First Savings Financial Group, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_____________________to__________________

Commission File No. 1-34155

First Savings Financial Group, Inc.

(Exact name of registrant as specified in its charter)

Indiana	37-1567871
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

702 North Shore Drive, Suite 300, Jeffersonville, Indiana 47130

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code 1-812-283-0724

	501 East Lewis & Clark Parkway, Clarksville, Indiana 47129
	(Former name, former address and former fiscal year, if changed since last report)

Securities Registered pursuant to Section 12(b) of the Act:

Common stock, $0.01 par value per share		FSFG		The NASDAQ Stock Market, LLC
(Title of each class)		(Trading Symbol)		(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨	Accelerated Filer x

Non-accelerated Filer ¨	Smaller Reporting Company x

Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock as of May 4, 2020 was 2,375,324.

FIRST SAVINGS FINANCIAL GROUP, INC.

INDEX

		Page
Part I	Financial Information

	Item 1. Financial Statements

	Consolidated Balance Sheets as of March 31, 2020 and September 30, 2019 (unaudited)	3

	Consolidated Statements of Income for the three months and six months ended March 31, 2020 and 2019 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended March 31, 2020 and 2019 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2020 and 2019 (unaudited)	6

	Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	8-56

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	57-68

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	69-70

	Item 4. Controls and Procedures	71

Part II	Other Information

	Item 1. Legal Proceedings	72

	Item 1A. Risk Factors	72

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	74

	Item 3. Defaults Upon Senior Securities	74

	Item 4. Mine Safety Disclosures	74

	Item 5. Other Information	75

	Item 6. Exhibits	75

Signatures		76

-2-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			September 30,
(In thousands, except share and per share data)	2020			2019
ASSETS
Cash and due from banks	$	11,790		$	13,008
Interest-bearing deposits with banks		10,813			28,424
Total cash and cash equivalents		22,603			41,432

Interest-bearing time deposits		2,510			2,265
Securities available for sale, at fair value		184,684			177,302
Securities held to maturity		2,189			2,336

Loans held for sale, residential mortgage, at fair value		139,084			80,457
Loans held for sale, Small Business Administration		24,843			15,613
Loans, net of allowance for loan losses of $11,691 at March 31, 2020 and $10,040 at September 30, 2019		877,276			810,658
Federal Reserve Bank and Federal Home Loan Bank stock, at cost		16,618			13,040
Premises and equipment		23,437			19,238
Other real estate owned, held for sale		1,838			1,893
Accrued interest receivable:
Loans		3,320			3,329
Securities		1,837			1,712
Cash surrender value of life insurance		31,383			26,546
Goodwill		9,848			9,848
Core deposit intangibles		1,309			1,416
Other assets		25,473			15,494
Total Assets	$	1,368,252		$	1,222,579

LIABILITIES
Deposits:
Noninterest-bearing	$	178,894		$	173,072
Interest-bearing		758,412			661,312
Total deposits		937,306			834,384

Federal funds purchased		-			4,000
Borrowings from Federal Home Loan Bank		270,000			222,544
Other borrowings		19,763			19,729
Accrued interest payable		787			935
Advance payments by borrowers for taxes and insurance		1,985			1,906
Accrued expenses and other liabilities		22,166			17,824
Total Liabilities		1,252,007			1,101,322

STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share; authorized 1,000,000 shares; none issued		-			-
Common stock of $.01 par value per share; authorized 20,000,000 shares; issued 2,567,842 shares (2,565,606 at September 30, 2019); outstanding 2,375,324 shares (2,350,229 shares at September 30, 2019)		26			26
Additional paid-in capital		27,436			27,494
Retained earnings - substantially restricted		93,425			91,228
Accumulated other comprehensive income		472			7,296
Unearned stock compensation		(446	)		(446	)
Less treasury stock, at cost - 192,518 shares (215,377 shares at September 30, 2019)		(4,254	)		(4,545	)
Total First Savings Financial Group, Inc. Stockholders' Equity		116,659			121,053
Noncontrolling interests in subsidiary		(414	)		204
Total Equity		116,245			121,257

Total Liabilities and Equity	$	1,368,252		$	1,222,579

See notes to consolidated financial statements.

-3-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands, except share and per share data)	2020			2019			2020			2019
INTEREST INCOME
Loans, including fees	$	11,858		$	10,211		$	23,671		$	20,021
Securities:
Taxable		504			727			1,089			1,474
Tax-exempt		1,027			1,006			2,037			1,976
Dividend income		151			142			305			263
Interest-bearing deposits with banks		153			221			358			374
Total interest income		13,693			12,307			27,460			24,108

INTEREST EXPENSE
Deposits		1,625			1,607			3,374			3,031
Federal funds purchased		1			-			1			-
Repurchase agreements		-			1			-			2
Borrowings from Federal Home Loan Bank		838			520			1,646			998
Other borrowings		319			318			637			640
Total interest expense		2,783			2,446			5,658			4,671

Net interest income		10,910			9,861			21,802			19,437
Provision for loan losses		1,705			340			2,210			655

Net interest income after provision for loan losses		9,205			9,521			19,592			18,782

NONINTEREST INCOME
Service charges on deposit accounts		441			449			950			960
ATM and interchange fees		524			446			1,027			899
Net gain on sales of available for sale securities and time deposits		7			1			7			1
Net unrealized loss on equity securities		(29	)		-			(27	)		-
Net gain on sales of loans, Small Business Administration		1,229			521			1,990			1,485
Mortgage banking income		8,272			5,074			24,089			8,363
Increase in cash surrender value of life insurance		194			147			356			258
Commission income		83			77			110			134
Real estate lease income		152			157			303			315
Net gain (loss) on premises and equipment		(5	)		8			(9	)		9
Other income		126			209			324			446
Total noninterest income		10,994			7,089			29,120			12,870

NONINTEREST EXPENSE
Compensation and benefits		14,907			8,240			32,727			15,497
Occupancy and equipment		1,989			1,420			3,911			2,745
Data processing		546			479			1,048			906
Advertising		1,777			567			3,243			963
Professional fees		522			504			1,149			964
FDIC insurance premiums		99			112			103			178
Net (gain) loss on other real estate owned		(7	)		7			(2	)		(14	)
Other operating expenses		2,242			1,551			4,168			3,057
Total noninterest expense		22,075			12,880			46,347			24,296
Income (loss) before income taxes		(1,876	)		3,730			2,365			7,356
Income tax expense (benefit)		(774	)		466			(136	)		988
Net Income (Loss)		(1,102	)		3,264			2,501			6,368
Less: net loss attributable to noncontrolling interests		(475	)		(269	)		(311	)		(96	)
Net Income (Loss) Attributable to First Savings Financial Group, Inc.	$	(627	)	$	3,533		$	2,812		$	6,464

Net income (loss) per share:
Basic	$	(0.27	)	$	1.53		$	1.20		$	2.82
Diluted	$	(0.26	)	$	1.50		$	1.18		$	2.73

Weighted average shares outstanding:
Basic		2,355,750			2,307,155			2,348,145			2,295,788
Diluted		2,379,901			2,360,004			2,381,356			2,366,524

Dividends per share	$	0.17		$	0.16		$	0.33		$	0.31

See notes to consolidated financial statements.

-4-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands)	2020			2019			2020			2019
Net Income (Loss)	$	(1,102	)	$	3,264		$	2,501		$	6,368

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period		(7,929	)		2,964			(8,677	)		4,744
Income tax benefit (expense)		1,694			(646	)		1,858			(1,036	)
Net of tax amount		(6,235	)		2,318			(6,819	)		3,708

Less: reclassification adjustment for realized gains included in net income		(7	)		(1	)		(7	)		(1	)
Income tax expense		2			-			2			-
Net of tax amount		(5	)		(1	)		(5	)		(1	)


Other Comprehensive Income (Loss)		(6,240	)		2,317			(6,824	)		3,707

Comprehensive Income (Loss)		(7,342	)		5,581			(4,323	)		10,075
Less: comprehensive loss attributable to noncontrolling interests		(475	)		(269	)		(311	)		(96	)

Comprehensive Income (Loss) Attributable to First Savings Financial Group, Inc.	$	(6,867	)	$	5,850		$	(4,012	)	$	10,171

See notes to consolidated financial statements.

-5-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except share and per share data)	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Unearned Stock Compensation			Treasury Stock			Noncontrolling Interests in Subsidiary			Total
Six Months Ended March 31, 2019:
Balances at October 1, 2018	$	26	$	27,630		$	76,523		$	382		$	(479	)	$	(5,269	)	$	1,432		$	100,245

Net income (loss)		-		-			6,464			-			-			-			(96	)		6,368

Other comprehensive income		-		-			-			3,707			-			-			-			3,707

Common stock dividends - $0.31 per share		-		-			(721	)		-			-			-			-			(721	)

Distributions to noncontrolling interests		-		-			-			-			-			-			(95	)		(95	)

Restricted stock grants, net of forfeitures - 2,329 shares		-		141			-			-			(141	)		-			-			-

Stock compensation expense		-		35			-			-			86			-			-			121

Stock option exercises - 61,484 shares		-		(306	)		-			-			-			1,183			-			877

Purchase of 10,968 treasury shares		-		-			-			-			-			(573	)		-			(573	)

Balances at March 31, 2019	$	26	$	27,500		$	82,266		$	4,089		$	(534	)	$	(4,659	)	$	1,241		$	109,929

Six Months Ended March 31, 2020:
Balances at October 1, 2019	$	26	$	27,494		$	91,228		$	7,296		$	(446	)	$	(4,545	)	$	204		$	121,257

Cumulative effect adjustment, adoption of ASU 2016-02		-		-			166			-			-			-			-			166

Net income (loss)		-		-			2,812			-			-			-			(311	)		2,501

Other comprehensive loss		-		-			-			(6,824	)		-			-			-			(6,824	)

Common stock dividends - $0.33 per share		-		-			(781	)		-			-			-			-			(781	)

Distributions to noncontrolling interests		-		-			-			-			-			-			(307	)		(307	)

Restricted stock grants - 1,436 shares		-		95			-			-			(95	)		-			-			-

Stock compensation expense		-		42			-			-			95			-			-			137

Stock option exercises - 28,361 shares		-		(195	)		-			-			-			593			-			398

Purchase of 4,702 treasury shares		-		-			-			-			-			(302	)		-			(302	)

Balances at March 31, 2020	$	26	$	27,436		$	93,425		$	472		$	(446	)	$	(4,254	)	$	(414	)	$	116,245

See notes to consolidated financial statements.

-6-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	March 31,
(In thousands)	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,501		$	6,368
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		2,210			655
Depreciation and amortization		761			860
Amortization of premiums and accretion of discounts on securities, net		269			240
Amortization and accretion of fair value adjustments on loans, net		(475	)		(318	)
Loans originated for sale		(1,111,120	)		(200,737	)
Proceeds on sales of loans		1,065,708			191,800
Net realized and unrealized gain on loans held for sale		(25,247	)		(7,762	)
Net realized and unrealized gain on other real estate owned		(13	)		(25	)
Net gain on sales of available for sale securities and time deposits		(7	)		(1	)
Increase in cash surrender value of life insurance		(356	)		(258	)
Net loss on equity securities		27			-
Net (gain) loss on sale of premises and equipment		9			(9	)
Deferred income taxes		415			279
Stock compensation expense		139			120
Increase in accrued interest receivable		(116	)		(315	)
Increase (decrease) in accrued interest payable		(148	)		582
Change in other assets and liabilities, net		(565	)		(1,178	)
Net Cash Used In Operating Activities		(66,008	)		(9,699	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing time deposits		(490	)		(690	)
Proceeds from sales and maturities of interest-bearing time deposits		245			245
Purchase of securities available for sale		(27,406	)		(18,296	)
Proceeds from sales of securities available for sale		3,180			226
Proceeds from maturities of securities available for sale		4,150			3,505
Proceeds from maturities of securities held to maturity		139			132
Principal collected on securities		3,753			12,354
Net increase in loans		(68,638	)		(59,358	)
Purchase of Federal Home Loan Bank stock		(3,578	)		(575	)
Investment in cash surrender value of life insurance		(4,481	)		(6,000	)
Proceeds from sale of other real estate owned		68			123
Purchase of premises and equipment		(5,345	)		(7,992	)
Proceeds from sales of premises and equipment		118			51
Net Cash Used In Investing Activities		(98,285	)		(76,275	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		102,922			13,658
Net decrease in federal funds purchased		(4,000	)		-
Net increase in repurchase agreements		-			1
Increase (decrease) in Federal Home Loan Bank line of credit		(12,544	)		5,938
Proceeds from Federal Home Loan Bank advances		240,000			95,000
Repayment of Federal Home Loan Bank advances		(180,000	)		(30,000	)
Net increase in advance payments by borrowers for taxes and insurance		79			56
Proceeds from exercise of stock options		148			337
Taxes paid on stock award shares for employees		(53	)		(32	)
Dividends paid on common stock		(781	)		(721	)
Distributions to noncontrolling interests		(307	)		(95	)
Net Cash Provided By Financing Activities		145,464			84,142
Net Decrease in Cash and Cash Equivalents		(18,829	)		(1,832	)

Cash and cash equivalents at beginning of period		41,432			42,274

Cash and Cash Equivalents at End of Period	$	22,603		$	40,442

See notes to consolidated financial statements.

-7-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Presentation of Interim Information

First Savings Financial Group, Inc. (the “Company”) is a financial holding company and the parent of First Savings Bank (the “Bank”) and First Savings Insurance Risk Management, Inc. (the “Captive”).

The Bank, which is a wholly-owned Indiana-chartered commercial bank subsidiary of the Company, provides a variety of banking services to individuals and business customers through 16 locations in southern Indiana. The Bank attracts deposits primarily from the general public and uses those funds, along with other borrowings, primarily to originate commercial mortgage, residential mortgage, construction, commercial business and consumer loans, and to a lesser extent, to invest in mortgage-backed securities, municipal bonds and other investment securities. The Bank has two wholly-owned subsidiaries: First Savings Investments, Inc., a Nevada corporation that manages a securities portfolio, and Southern Indiana Financial Corporation, which is currently inactive.

The Captive, which is a wholly-owned insurance subsidiary of the Company, is a Nevada corporation that provides property and casualty insurance to the Company, the Bank and the Bank’s active subsidiaries. In addition, the Captive provides reinsurance to 11 other third-party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace.

On April 25, 2017, the Bank formed Q2 Business Capital, LLC (“Q2”), which is an Indiana limited liability company that specializes in the origination and servicing of U.S. Small Business Administration (“SBA”) loans. The Bank owns 51% of Q2 with the option to purchase the minority interest between July 1, 2020 and September 30, 2020. In accordance with Q2’s operating agreement, the Bank was allocated the first $1.7 million of Q2’s cumulative net income with any additional profits and losses allocated 51% to the Bank and 49% to Q2’s minority members.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of March 31, 2020, the results of operations for the three- and six-month periods ended March 31, 2020 and 2019, and the cash flows for the six-month periods ended March 31, 2020 and 2019. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year.

The unaudited consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements, conform to general practices within the banking industry and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s audited consolidated financial statements and related notes for the year ended September 30, 2019 included in the Company’s Annual Report on Form 10-K.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or stockholders’ equity.

-8-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Investment Securities

U.S. agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include treasury notes issued by the U.S. government; securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency; and securities issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”), which are U.S. government sponsored enterprises. The Company holds municipal bonds issued by municipal governments within the U.S. The Company also holds pass-through asset-backed securities guaranteed by the SBA representing participating interests in pools of long term debentures issued by state and local development companies certified by the SBA. Privately issued CMO and asset-backed securities (“ABS”) are complex securities issued by non-government special purpose entities that are collateralized by residential mortgage loans and residential home equity loans.

Investment securities have been classified according to management’s intent.

-9-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Securities Available for Sale and Held to Maturity

The amortized cost of securities available for sale and held to maturity and their approximate fair values are as follows:

	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Fair Value
	(In thousands)
March 31, 2020:
Securities available for sale:

Agency mortgage-backed	$	8,855	$	479	$	-	$	9,334
Agency CMO		8,427		91		80		8,438
Privately-issued CMO		1,063		6		40		1,029
Privately-issued ABS		949		43		56		936
SBA certificates		718		30		3		745
Municipal bonds		164,013		2,020		1,831		164,202

Total securities available for sale	$	184,025	$	2,669	$	2,010	$	184,684

Securities held to maturity:

Agency mortgage-backed	$	93	$	6	$	-	$	99
Municipal bonds		2,096		326		-		2,422

Total securities held to maturity	$	2,189	$	332	$	-	$	2,521

The Company obtains pricing for its available for sale securities portfolio from an independent third party pricing service approximately 10 days prior to each month end. Due to significant market movements at the end of March 2020 in response to the COVID-19 pandemic, the values obtained for the available for sale securities portfolio showed a significant decrease compared to the prior quarter. However, based on changes in the market subsequent to the valuation date management believes the decrease in the valuation of the available for sale securities portfolio would have been partially mitigated at March 31, 2020.

-10-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Fair Value
	(In thousands)
September 30, 2019:
Securities available for sale:

Agency mortgage-backed	$	13,743	$	366	$	12	$	14,097
Agency CMO		8,834		221		7		9,048
Privately-issued CMO		1,242		142		2		1,382
Privately-issued ABS		1,022		156		-		1,178
SBA certificates		1,119		41		6		1,154
Municipal bonds		141,995		8,465		17		150,443

Total securities available for sale	$	167,955	$	9,391	$	44	$	177,302

Securities held to maturity:

Agency mortgage-backed	$	102	$	7	$	-	$	109
Municipal bonds		2,234		327		-		2,561

Total securities held to maturity	$	2,336	$	334	$	-	$	2,670

The amortized cost and fair value of investment securities as of March 31, 2020 by contractual maturity are shown below. CMO, ABS, SBA certificates, and mortgage-backed securities which do not have a single maturity date are shown separately.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due within one year	$	4,304	$	4,371	$	244	$	277
Due after one year through five years		26,250		26,564		999		1,141
Due after five years through ten years		25,012		25,431		718		844
Due after ten years		108,447		107,836		135		160
CMO		9,490		9,467		-		-
ABS		949		936		-		-
SBA certificates		718		745		-		-
Mortgage-backed securities		8,855		9,334		93		99

	$	184,025	$	184,684	$	2,189	$	2,521

-11-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Information pertaining to investment securities with gross unrealized losses at March 31, 2020 and September 30, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

	Number of Investment Positions		Fair Value		Gross Unrealized Losses
	(Dollars in thousands)
March 31, 2020:
Securities available for sale:

Continuous loss position less than twelve months:
Agency CMO		3	$	3,877	$	80
Privately-issued CMO		3		947		28
Privately-issued ABS		2		489		56
Municipals		103		58,572		1,831

Total less than twelve months		111		63,885		1,995

Continuous loss position more than twelve months:
Privately-issued CMO		1		23		12
SBA certificates		1		259		3

Total more than twelve months		2		282		15

Total securities available for sale		113	$	64,167	$	2,010

September 30, 2019:
Securities available for sale:

Continuous loss position less than twelve months:
Agency mortgage-backed		3	$	1,248	$	1
Agency CMO		1		1,962		1
Municipal bonds		3		1,694		16

Total less than twelve months		7		4,904		18

Continuous loss position more than twelve months:
Agency mortgage-backed		2		785		11
Agency CMO		2		956		6
Privately-issued CMO		1		33		2
SBA certificates		1		451		6
Municipal bonds		1		140		1

Total more than twelve months		7		2,365		26

Total securities available for sale		14	$	7,269	$	44

At March 31, 2020 and September 30, 2019, the Company did not have any securities held to maturity with an unrealized loss.

-12-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The total available for sale debt securities in loss positions at March 31, 2020, which consisted of U.S. government agency mortgage backed securities and CMOs, privately issued CMOs, SBA certificates and municipal bonds, had a fair value as a percentage of amortized cost of 96.96%. All of the agency and municipal securities are issued by U.S. government-sponsored enterprises and municipal governments, and are generally secured by first mortgage loans and municipal project revenues.

The Company evaluates the existence of a potential credit loss component related to the decline in fair value of the privately issued CMO and ABS portfolios each quarter using an independent third party analysis. At March 31, 2020, the Company held twelve privately-issued CMO and ABS securities, acquired in a 2009 bank merger, with an aggregate amortized cost of $984,000 and fair value of $959,000 that have been downgraded to a substandard regulatory classification due to the security’s credit quality rating by various nationally recognized statistical rating organizations (“NRSROs”).

At March 31, 2020, four privately-issued CMO securities and two privately-issued ABS were in a loss position and had depreciated approximately 6.16% from the Company’s carrying value and were collateralized by residential mortgage loans. These securities had a total fair value of $1.5 million and a total unrealized loss of $96,000 at March 31, 2020. The two privately-issued ABS and one privately-issued CMO were rated below investment grade by NRSROs, and had a total fair value of $948,000 and a total unrealized loss of $28,000. The remaining three privately-issued CMO securities were rated above investment grade by NRSROs, and had a total fair value of $511,000 and a total unrealized loss of $68,000. Based on the independent third party analysis of the expected cash flows, management determined that no other-than-temporary impairment was required to be recognized on the privately issued CMO and ABS portfolios at March 31, 2020. While the Company does not anticipate additional credit-related impairment losses at March 31, 2020, additional deterioration in market and economic conditions may have an adverse impact on the credit quality of the portfolio, and therefore, require a credit related impairment charge in the future.

The unrealized losses on U.S. government agency mortgage-backed securities and CMOs, SBA certificates and municipal bonds relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities to maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

-13-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

During the three and six-month periods ended March 31, 2020, the Company realized gross gains on sales of available for sale securities of $15,000, and gross losses of $8,000. During the three and six-month periods ended March 31, 2019, the Company realized gross gains on sales of available for sale securities of $1,000, and no gross losses.

Certain available for sale debt securities were pledged under repurchase agreements and to secure FHLB borrowings at March 31, 2020 and September 30, 2019, and may be pledged to secure federal funds borrowings.

Loans and Allowance for Loan Losses

Loans at March 31, 2020 and September 30, 2019 consisted of the following:

	March 31, 2020			September 30, 2019
	(In thousands)
Real estate mortgage:
1-4 family residential	$	196,378		$	198,067
Commercial		483,368			436,020
Multifamily residential		39,068			38,226
Residential construction		9,542			12,545
Commercial construction		10,414			6,995
Land and land development		10,192			10,536
Commercial business		88,091			73,034

Consumer:
Home equity		35,892			28,651
Auto		13,052			13,347
Other consumer		2,298			2,663
Total Loans		888,295			820,084

Deferred loan origination fees and costs, net		672			614
Allowance for loan losses		(11,691	)		(10,040	)

Loans, net	$	877,276		$	810,658

During the six-month period ended March 31, 2020, there was no significant change in the Company’s lending activities or the methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019. Certain qualitative factors used to determine the allowance for loan losses at March 31, 2020 were increased due to economic uncertainties related to the novel coronavirus (“COVID-19”).

At March 31, 2020 and September 30, 2019, the Bank did not own any residential real estate properties where physical possession has been obtained. At March 31, 2020 and September 30, 2019, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $1.4 million and $1.3 million, respectively.

-14-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table provides the components of the recorded investment in loans as of March 31, 2020:

	Residential Real Estate			Commercial Real Estate		Multifamily			Construction		Land & Land Development			Commercial Business		Consumer			Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	196,378		$	483,368	$	39,068		$	19,956	$	10,192		$	88,091	$	51,242		$	888,295

Accrued interest receivable		550			1,935		88			94		21			508		124			3,320

Net deferred loan origination fees and costs		(103	)		444		(36	)		18		(4	)		380		(27	)		672

Recorded investment in loans	$	196,825		$	485,747	$	39,120		$	20,068	$	10,209		$	88,979	$	51,339		$	892,287


Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	5,501		$	11,320	$	702		$	-	$	1		$	2,066	$	224		$	19,814

Collectively evaluated for impairment		191,324			474,427		38,418			20,068		10,208			86,913		51,115			872,473

Ending balance	$	196,825		$	485,747	$	39,120		$	20,068	$	10,209		$	88,979	$	51,339		$	892,287

-15-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table provides the components of the recorded investment in loans as of September 30, 2019:

	Residential Real Estate			Commercial Real Estate		Multifamily			Construction		Land & Land Development			Commercial Business		Consumer			Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	198,067		$	436,020	$	38,226		$	19,540	$	10,536		$	73,034	$	44,661		$	820,084

Accrued interest receivable		627			1,922		99			117		29			448		87			3,329

Net deferred loan origination fees and costs		(98	)		408		(33	)		3		(1	)		366		(31	)		614

Recorded investment in loans	$	198,596		$	438,350	$	38,292		$	19,660	$	10,564		$	73,848	$	44,717		$	824,027


Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	4,448		$	7,647	$	-		$	-	$	-		$	105	$	234		$	12,434

Collectively evaluated for impairment		194,148			430,703		38,292			19,660		10,564			73,743		44,483			811,593

Ending balance	$	198,596		$	438,350	$	38,292		$	19,660	$	10,564		$	73,848	$	44,717		$	824,027

-16-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of the allowance for loan losses as of March 31, 2020 is as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land & Land Development		Commercial Business		Consumer		Total
	(In thousands)
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	-	$	1,645	$	-	$	-	$	-	$	556	$	-	$	2,201

Collectively evaluated for impairment		400		5,290		499		366		203		2,031		701		9,490

Ending balance	$	400	$	6,935	$	499	$	366	$	203	$	2,587	$	701	$	11,691

An analysis of the allowance for loan losses as of September 30, 2019 is as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land & Land Development		Commercial Business		Consumer		Total
	(In thousands)
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	10	$	512	$	-	$	-	$	-	$	-	$	23	$	545

Collectively evaluated for impairment		328		5,869		478		421		209		1,639		551		9,495

Ending balance	$	338	$	6,381	$	478	$	421	$	209	$	1,639	$	574	$	10,040

-17-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2020 is as follows:

	Residential Real Estate			Commercial Real Estate			Multifamily		Construction			Land & Land Development		Commercial Business			Consumer			Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	339		$	6,694		$	481	$	395		$	201	$	1,753		$	667		$	10,530
Provisions		54			348			18		(29	)		2		1,229			83			1,705
Charge-offs		(4	)		(107	)		-		-			-		(396	)		(62	)		(569	)
Recoveries		11			-			-		-			-		1			13			25

Ending balance	$	400		$	6,935		$	499	$	366		$	203	$	2,587		$	701		$	11,691

An analysis of the changes in the allowance for loan losses for the six months ended March 31, 2020 is as follows:

	Residential Real Estate			Commercial Real Estate			Multifamily		Construction			Land & Land Development			Commercial Business			Consumer			Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	338		$	6,381		$	478	$	421		$	209		$	1,639		$	574		$	10,040
Provisions		78			623			21		(55	)		(6	)		1,338			211			2,210
Charge-offs		(36	)		(115	)		-		-			-			(396	)		(126	)		(673	)
Recoveries		20			46			-		-			-			6			42			114

Ending balance	$	400		$	6,935		$	499	$	366		$	203		$	2,587		$	701		$	11,691

-18-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2019 is as follows:

	Residential Real Estate			Commercial Real Estate			Multifamily		Construction			Land & Land Development		Commercial Business		Consumer			Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	249		$	6,716		$	158	$	693		$	219	$	1,288	$	297		$	9,620
Provisions		(28	)		(20	)		74		(178	)		18		246		228			340
Charge-offs		(9	)		-			-		-			-		-		(39	)		(48	)
Recoveries		8			-			-		-			-		1		13			22

Ending balance	$	220		$	6,696		$	232	$	515		$	237	$	1,535	$	499		$	9,934

An analysis of the changes in the allowance for loan losses for the six months ended March 31, 2019 is as follows:

	Residential Real Estate			Commercial Real Estate			Multifamily		Construction			Land & Land Development		Commercial Business		Consumer			Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	274		$	6,825		$	195	$	580		$	210	$	1,041	$	198		$	9,323
Provisions		(58	)		(129	)		37		(65	)		27		493		350			655
Charge-offs		(10	)		-			-		-			-		-		(81	)		(91	)
Recoveries		14			-			-		-			-		1		32			47

Ending balance	$	220		$	6,696		$	232	$	515		$	237	$	1,535	$	499		$	9,934

-19-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents impaired loans individually evaluated for impairment as of March 31, 2020 and for the three and six months ended March 31, 2020 and 2019.

	At March 31, 2020						Three Months Ended March 31,								Six Months Ended March 31,
							2020		2020		2019		2019		2020		2020		2019		2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	5,501	$	5,961	$	-	$	5,338	$	34	$	5,132	$	29	$	5,215	$	61	$	5,203	$	63
Commercial real estate		4,430		4,594		-		5,399		47		6,616		80		5,402		109		6,675		162
Multifamily		702		703		-		352		-		-		-		234		-		-		-
Construction		-		-		-		-		-		-		-		-		-		-		-
Land and land development		1		1		-		1		-		-		-		-		-		12		-
Commercial business		497		602		-		347		-		277		2		267		1		283		4
Consumer		66		66		-		75		-		118		1		77		2		119		2
	$	11,197	$	11,927	$	-	$	11,512	$	81	$	12,143	$	112	$	11,195	$	173	$	12,292	$	231

Loans with an allowance recorded:
Residential real estate	$	-	$	-	$	-	$	55	$	-	$	91	$	-	$	39	$	-	$	172	$	-
Commercial real estate		6,890		7,048		1,645		4,611		-		2,104		-		3,953		-		1,722		-
Multifamily		-		-		-		-		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-		-		-		-		-
Land and land development		-		-		-		-		-		-		-		-		-		-		-
Commercial business		1,569		1,881		556		940		-		20		-		627		-		11		-
Consumer		158		160		-		183		-		153		-		174		-		164		-
	$	8,617	$	9,089	$	2,201	$	5,789	$	-	$	2,368	$	-	$	4,793	$	-	$	2,069	$	-

Total:
Residential real estate	$	5,501	$	5,961	$	-	$	5,393	$	34	$	5,223	$	29	$	5,254	$	61	$	5,375	$	63
Commercial real estate		11,320		11,642		1,645		10,010		47		8,720		80		9,355		109		8,397		162
Multifamily		702		703		-		352		-		-		-		234		-		-		-
Construction		-		-		-		-		-		-		-		-		-		-		-
Land and land development		1		1		-		1		-		-		-		-		-		12		-
Commercial business		2,066		2,483		556		1,287		-		297		2		894		1		294		4
Consumer		224		226		-		258		-		271		1		251		2		283		2
	$	19,814	$	21,016	$	2,201	$	17,301	$	81	$	14,511	$	112	$	15,988	$	173	$	14,361	$	231

The Company did not recognize any interest income using the cash receipts method during the three- and six-month periods ended March 31, 2020 and 2019.

-20-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents impaired loans individually evaluated for impairment as of September 30, 2019.

	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	4,438	$	4,967	$	-
Commercial real estate		5,401		5,408		-
Multifamily		-		-		-
Construction		-		-		-
Land and land development		-		-		-
Commercial business		105		106		-
Consumer		78		81		-

	$	10,022	$	10,562	$	-

Loans with an allowance recorded:
Residential real estate	$	10	$	7	$	10
Commercial real estate		2,246		2,637		512
Multifamily		-		-		-
Construction		-		-		-
Land and land development		-		-		-
Commercial business		-		-		-
Consumer		156		155		23

	$	2,412	$	2,799	$	545

Total:
Residential real estate	$	4,448	$	4,974	$	10
Commercial real estate		7,647		8,045		512
Multifamily		-		-		-
Construction		-		-		-
Land and land development		-		-		-
Commercial business		105		106		-
Consumer		234		236		23

	$	12,434	$	13,361	$	545

-21-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Nonperforming loans consist of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at March 31, 2020:

	Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans
	(In thousands)
Residential real estate	$	2,655	$	-	$	2,655
Commercial real estate		8,224		-		8,224
Multifamily		702		-		702
Construction		-		-		-
Land and land development		1		-		1
Commercial business		2,062		-		2,062
Consumer		163		-		163

Total	$	13,807	$	-	$	13,807

The following table presents the recorded investment in nonperforming loans at September 30, 2019:

	Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans
	(In thousands)
Residential real estate	$	2,580	$	12	$	2,592
Commercial real estate		2,425		-		2,425
Multifamily		-		-		-
Construction		-		-		-
Land and land development		-		-		-
Commercial business		-		-		-
Consumer		163		-		163

Total	$	5,168	$	12	$	5,180

-22-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents the aging of the recorded investment in past due loans at March 31, 2020:

	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Residential real estate	$	1,832	$	364	$	1,837	$	4,033	$	192,792	$	196,825
Commercial real estate		1,828		1,116		2,409		5,353		480,394		485,747
Multifamily		-		-		-		-		39,120		39,120
Construction		-		-		-		-		20,068		20,068
Land and land development		-		-		1		1		10,208		10,209
Commercial business		219		437		-		656		88,323		88,979
Consumer		41		1		4		46		51,293		51,339

Total	$	3,920	$	1,918	$	4,251	$	10,089	$	882,198	$	892,287

The following table presents the aging of the recorded investment in past due loans at September 30, 2019:

	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Residential real estate	$	1,619	$	577	$	1,121	$	3,317	$	195,279	$	198,596
Commercial real estate		892		772		1,523		3,187		435,163		438,350
Multifamily		-		-		-		-		38,292		38,292
Construction		-		-		-		-		19,660		19,660
Land and land development		-		-		-		-		10,564		10,564
Commercial business		182		-		-		182		73,666		73,848
Consumer		77		17		19		113		44,604		44,717

Total	$	2,770	$	1,366	$	2,663	$	6,799	$	817,228	$	824,027

-23-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic conditions and trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted.

-24-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of March 31, 2020, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land and Land Development		Commercial Business		Consumer		Total
	(In thousands)
Pass	$	193,101	$	471,765	$	38,418	$	20,068	$	10,208	$	85,585	$	51,310	$	870,455
Special Mention		-		141		-		-		-		90		-		231
Substandard		3,588		13,841		702		-		1		3,304		29		21,465
Doubtful		136		-		-		-		-		-		-		136
Loss		-		-		-		-		-		-		-		-

Total	$	196,825	$	485,747	$	39,120	$	20,068	$	10,209	$	88,979	$	51,339	$	892,287

As of September 30, 2019, the recorded investment in loans by risk category was as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land and Land Development		Commercial Business		Consumer		Total
	(In thousands)
Pass	$	194,591	$	424,989	$	37,823	$	19,660	$	10,564	$	71,050	$	44,618	$	803,295
Special Mention		-		904		-		-		-		-		-		904
Substandard		3,946		12,457		469		-		-		2,798		97		19,767
Doubtful		59		-		-		-		-		-		2		61
Loss		-		-		-		-		-		-		-		-

Total	$	198,596	$	438,350	$	38,292	$	19,660	$	10,564	$	73,848	$	44,717	$	824,027

-25-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Troubled Debt Restructurings

Modification of a loan is considered to be a troubled debt restructuring (“TDR”) if the debtor is experiencing financial difficulties and the Company grants a concession to the debtor that it would not otherwise consider. By granting the concession, the Company expects to obtain more cash or other value from the debtor, or to increase the probability of receipt, than would be expected by not granting the concession. The concession may include, but is not limited to, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession will be granted when, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest at the original stated rate. A concession may also be granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company’s determination of whether a loan modification is a TDR considers the individual facts and circumstances surrounding each modification.

Loans modified in a TDR may be retained on accrual status if the borrower has maintained a period of performance in which the borrower’s lending relationship was not greater than ninety days delinquent at the time of restructuring and the Company determines the future collection of principal and interest is reasonably assured. Loans modified in a TDR that are placed on nonaccrual status at the time of restructuring will continue on nonaccrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of at least six consecutive months.

The following table summarizes the Company’s recorded investment in TDRs at March 31, 2020 and September 30, 2019. There was $622,000 of specific reserves included in the allowance for loan losses related to TDRs at March 31, 2020. There was no specific reserve included in the allowance for loan losses related to commercial real estate TDRs at September 30, 2019.

	Accruing		Nonaccrual		Total
	(In thousands)
March 31, 2020:
Residential real estate	$	2,846	$	184	$	3,030
Commercial real estate		3,096		4,451		7,547
Commercial business		3		-		3
Consumer		61		-		61
Total	$	6,006	$	4,635	$	10,641

September 30, 2019:
Residential real estate	$	1,868	$	351	$	2,219
Commercial real estate		5,222		59		5,281
Commercial business		105		-		105
Consumer		70		-		70
Total	$	7,265	$	410	$	7,675

-26-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table summarizes information regarding TDRs that were restructured during the three- and six-month periods ended March 31, 2020:

	Number of Loans		Pre- Modification Principal Balance		Post- Modification Principal Balance
	(Dollars in thousands)
Three Months Ended March 31, 2020:
Residential real estate		1	$	1,099	$	1,100
Commercial real estate		1		3,831		3,832
Total		2	$	4,930	$	4,932
Six Months Ended March 31, 2020:
Residential real estate		1	$	1,099	$	1,100
Commercial business		1		3,831		3,832
Total		2	$	4,930	$	4,932

There were no TDRs that were restructured during the three- and six-month periods ended March 31, 2019.

At March 31, 2020 and September 30, 2019, the Company had committed to lend $1,000 to customers with outstanding loans classified as TDRs.

There were no principal charge-offs recorded as a result of TDRs during the three- and six-month periods ended March 31, 2020 and 2019. At March 31, 2020, there was $622,000 of specific allowance for loan losses related to TDRs modified during the three- and six-month periods ended March 31, 2020. At March 31, 2019, there was no specific allowance for loan losses related to TDRs modified during the three- and six-month periods ended March 31, 2019. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

During the three- and six-month periods ended March 31, 2020 and the three-month period ending March 31, 2019, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default. During the six-month period ended March 31, 2019, the Company had one TDR with an outstanding balance of $114,000 that was modified within the previous twelve months and for which there was a payment default.

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance indicates that, in consultation with the Financial Accounting Standards Board (“FASB”), the federal banking agencies concluded that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. The CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of May 8, 2020, the Company had approved payment extensions or loan forbearance agreements using this guidance on approximately $86.1 million of balances in the loan portfolio, of which $77.7 million related to commercial real estate, $5.8 million related to residential real estate and consumer loans, and $2.6 million related to SBA lending relationships. These payment extensions or loan forbearance agreements are generally for periods of three months or less.

-27-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

SBA Loan Servicing Rights

The Company originates loans to commercial customers under the SBA 7(a) program and other programs, and sells the guaranteed portion of the SBA loans with servicing rights retained. Loan servicing rights on originated SBA loans that have been sold are initially recorded at fair value. Capitalized SBA servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of SBA servicing rights is assessed using the present value of estimated future cash flows.

The aggregate fair value of SBA loan servicing rights approximates its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the SBA loan servicing rights include the discount rate and prepayment speed assumptions. For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the SBA loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in net gain on sales of SBA loans in the consolidated statements of income.

The unpaid principal balance of SBA loans serviced for others was $168.4 million, $165.0 million and $137.6 million at March 31, 2020, September 30, 2019 and March 31, 2019, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $13,000 and $30,000 for the three- and six-month periods ended March 31, 2020, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $9,000 and $16,000 for the three- and six-month periods ended March 31, 2019, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $407,000 and $819,000 for the three- and six-month periods ended March 31, 2020, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $301,000 and $573,000 for the three- and six-month periods ended March 31, 2019, respectively. Net servicing income and costs are included in other noninterest income in the consolidated statements of income.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of SBA loan servicing rights for the three- and six-month periods ended March 31, 2020 and 2019 is as follows:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
	(In thousands)
Balance, beginning of period	$	3,005		$	2,554		$	3,030		$	2,405
Servicing rights resulting from transfers of loans		329			192			551			443
Amortization		(250	)		(151	)		(467	)		(253	)
Change in valuation, allowance		(193	)		-			(223	)		-
Balance, end of period	$	2,891		$	2,595		$	2,891		$	2,595

The valuation allowance related to SBA loan servicing rights at March 31, 2020 and September 30, 2019 was $371,000 and $148,000, respectively.

Mortgage Servicing Rights (“MSRs”)

The Company originates residential mortgage loans for sale in the secondary market and in August 2019 began retaining servicing for certain of these loans when they are sold. MSRs retained for originated loans that have been sold are accounted for at fair value. The fair value of MSRs is determined using the present value of estimated expected net servicing income using assumptions about expected mortgage loan prepayment rates, discount rate, servicing costs, and other economic factors, which are determined based on current market conditions. Changes in these underlying assumptions could cause the fair value of MSRs to change significantly in the future. Changes in fair value of MSRs are recorded in mortgage banking income in the accompanying consolidated statements of income. MSRs are subject to changes in value from, among other things, changes in interest rates, prepayments of the underlying loans and changes in the credit quality of the underlying loans.

A valuation model employed by an independent third party calculates the present value of future cash flows and is used to value the MSRs on a monthly basis. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the MSRs at March 31, 2020 and September 30, 2019 were as follows:

Assumption

Range of Assumption (Weighted Average)

March 31, 2020

Range of Assumption (Weighted Average)

September 30, 2019

Discount rate

9.25%

Prepayment rate

4.06% to 89.72% (25.09%)

4.42% to 72.79% (18.75%)

-29-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The unpaid principal balance of residential mortgage loans serviced for others was $497.5 million and $91.6 million at March 31, 2020 and September 30, 2019, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing and other liabilities were $3.9 million and $427,000 at March 31, 2020 and September 30, 2019, respectively. Contractually specified servicing fees (net of direct servicing expenses), late fees and other ancillary fees related to residential mortgage loans serviced for others were $106,000 and $96,000 for the three and six months ended March 31, 2020, respectively, and are included in other noninterest income in the consolidated statements of income.

Changes in the carrying value of MSRs accounted for at fair value for the three- and six-months ended March 31, 2020 were as follows:

	Three Months Ended March 31, 2020			Six Months Ended March 31, 2020
	(In thousands)
Fair value as of beginning of period	$	3,254		$	934
Servicing rights capitalized		1,908			4,185
Changes in fair value related to:
Loan repayments		(145	)		(184	)
Changes in valuation model inputs or assumptions		(962	)		(880	)

Fair value as of end of period	$	4,055		$	4,055

Deposits

Deposits at March 31, 2020 and September 30, 2019 consisted of the following:

	March 31, 2020		September 30, 2019
	(In thousands)
Noninterest-bearing demand deposits	$	178,894	$	173,072
NOW accounts		183,776		173,746
Money market accounts		108,494		121,281
Savings accounts		125,007		120,393
Retail time deposits		167,890		146,227
Brokered time deposits		173,245		99,665

Total	$	937,306	$	834,384

-30-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Supplemental Disclosure for Net Income (Loss) Per Share

Net income (loss) per share information is presented below for the three- and six-month periods ended March 31, 2020 and 2019.

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2020			2019		2020		2019
	(Dollars in thousands, except per share data)
Basic:
Earnings:
Net income (loss) attributable to First Savings Financial Group, Inc.	$	(627	)	$	3,533	$	2,812	$	6,464
Shares:
Weighted average common shares outstanding, basic		2,355,750			2,307,155		2,348,145		2,295,788

Net income (loss) per common share, basic	$	(0.27	)	$	1.53	$	1.20	$	2.82

Diluted:
Earnings:
Net income (loss) attributable to First Savings Financial Group, Inc.	$	(627	)	$	3,533	$	2,812	$	6,464
Shares:
Weighted average common shares outstanding, basic		2,355,750			2,307,155		2,348,145		2,295,788
Add: Dilutive effect of outstanding options		21,440			50,205		29,220		65,650
Add: Dilutive effect of restricted stock		2,711			2,644		3,991		5,086
Weighted average common shares outstanding, as adjusted		2,379,901			2,360,004		2,381,356		2,366,524

Net income (loss) per common share, diluted	$	(0.26	)	$	1.50	$	1.18	$	2.73

Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.

There were no antidilutive restricted stock awards excluded from the calculation of diluted net income per share for the three- and six-month periods ended March 31, 2020 and 2019. Stock options for 22,158 and 19,158 shares of common stock were excluded from the calculation of diluted net income per common share for the three- and six-month periods ended March 31, 2020, respectively, because their effect was antidilutive. Stock options for 10,200 shares of common stock were excluded from the calculation of diluted net income per common share for the three- and six-month periods ended March 31, 2019, because their effect was antidilutive.

-31-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Supplemental Disclosures of Cash Flow Information

	Six Months Ended
	March 31,
	2020		2019
		(In thousands)
Cash payments for:
Interest	$	5,820	$	4,095
Income taxes (net of refunds received)		1,195		337
Noncash investing and financing activities:
Transfers from loans to other real estate owned		-		224
Proceeds from sales of other real estate owned financed through loans		-		47
Right-of-use assets obtained in exchange for lease obligations		7,506		-
Noncash exercise of stock options		249		542
Transfers from premises and equipment to other real estate owned		-		1,838

Fair Value Measurements and Disclosures about Fair Value of Financial Instruments

FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

	Level 1:	Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

	Level 2:	Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.

	Level 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value or the lower of cost or fair value. The tables below present the balances of financial assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2020 and September 30, 2019.

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
March 31, 2020:
Assets Measured - Recurring Basis:
Securities available for sale:
Agency mortgage-backed	$	-	$	9,334	$	-	$	9,334
Agency CMO		-		8,438		-		8,438
Privately-issued CMO		-		1,029		-		1,029
Privately-issued ABS		-		936		-		936
SBA certificates		-		745		-		745
Municipal		-		164,202		-		164,202
Total securities available for sale	$	-	$	184,684	$	-	$	184,684
Residential mortgage loans held for sale – fair value option elected	$	-	$	139,084	$	-	$	139,084
Derivative assets (included in other assets)	$	-	$	30	$	5,678	$	5,708
Equity securities (included in other assets)	$	58	$	-	$	-	$	58
Mortgage servicing rights (included in other assets)	$	-	$	-	$	4,055	$	4,055

Liabilities Measured - Recurring Basis:
Derivative liabilities (included in other liabilities)	$	-	$	7,420	$	-	$	7,420

*Assets Measured - Nonrecurring Basis:*
Impaired loans:
Residential real estate	$	-	$	-	$	5,501	$	5,501
Commercial real estate		-		-		9,675		9,675
Multifamily real estate		-		-		702		702
Commercial business		-		-		1,510		1,510
Land and land development		-		-		1		1
Consumer		-		-		224		224
Total impaired loans	$	-	$	-	$	17,613	$	17,613
SBA loans held for sale	$	-	$	-	$	24,843	$	24,843
SBA loan servicing rights	$	-	$	-	$	2,891	$	2,891
Other real estate owned, held for sale:
Former bank premises	$	-	$	-	$	1,838	$	1,838
Total other real estate owned	$	-	$	-	$	1,838	$	1,838

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

	Carrying Value
		Level 1		Level 2		Level 3		Total
		(In thousands)
September 30, 2019:
Assets Measured – Recurring Basis
Securities available for sale:
Agency mortgage-backed		$	-	$	14,097	$	-	$	14,097
Agency CMO			-		9,048		-		9,048
Privately-issued CMO			-		1,382		-		1,382
Privately-issued ABS			-		1,178		-		1,178
SBA certificates			-		1,154		-		1,154
Municipal bonds			-		150,443		-		150,443
Total securities available for sale		$	-	$	177,302	$	-	$	177,302

Residential mortgage loans held for sale – fair value option elected		$	-	$	80,457	$	-	$	80,457

Derivative assets (included in other assets)		$	-	$	130	$	3,269	$	3,399
Equity securities (included in other assets)		$	85	$	-	$	-	$	85
Mortgage servicing rights (included in other assets)		$	-	$	-	$	934	$	934

Liabilities Measured – Recurring Basis
Derivative liabilities (included in other liabilities)		$	-	$	329	$	-	$	329

Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate		$	-	$	-	$	4,438	$	4,438
Commercial real estate			-		-		7,135		7,135
Commercial business			-		-		105		105
Consumer			-		-		211		211
Total impaired loans		$	-	$	-	$	11,889	$	11,889

SBA loans held for sale		$	-	$	15,613	$	-	$	15,613

SBA loan servicing rights		$	-	$	-	$	3,030	$	3,030

Other real estate owned, held for sale:
Former bank premises		$	-	$	-	$	1,893	$	1,893
Total other real estate owned		$	-	$	-	$	1,893	$	1,893

-34-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Fair value is based upon quoted market prices where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or at the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Other than SBA loans held for sale (see discussion below), there have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the six-month period ended March 31, 2020.

Securities Available for Sale and Equity Securities. Securities classified as available for sale and equity securities are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent third party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level 3 of the fair value hierarchy. Changes in fair value of equity securities are reported in noninterest income. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

Residential Mortgage Loans Held for Sale. The Company elected to record substantially all of its residential mortgage loans held for sale at fair value in accordance with FASB ASC 825-10. The fair value of residential mortgage loans held for sale is based on specific prices of the underlying contracts for sale to investors or current secondary market prices for loans with similar characteristics, and is classified as Level 2 in the fair value hierarchy.

SBA Loans Held for Sale. SBA loans held for sale are carried at the lower of cost or market value. At September 30, 2019, the fair value of SBA loans held for sale was obtained from an independent third party pricing firm based on specific prices of the underlying contracts for sale to investors or current secondary market prices for loans with similar characteristics, and was classified as Level 2 in the fair value hierarchy. At March 31, 2020, the fair value of SBA loans held for sale reflects management’s estimate based on the weighted average price of SBA loans sold to investors during the prior quarter, and is classified as Level 3 in the fair value hierarchy.

Derivative Financial Instruments. Derivative financial instruments consist of mortgage banking interest rate lock commitments and forward mortgage loan sale commitments. The fair value of forward mortgage loan sale commitments is obtained from an independent third party and is based on the gain or loss that would occur if the Company were to pair-off the sales transaction with the investor. The fair value of forward mortgage loan sale commitments is classified as Level 2 in the fair value hierarchy.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The fair value of interest rate lock commitments is also obtained from an independent third party and is based on investor prices for the underlying loans or current secondary market prices for loans with similar characteristics, less estimated costs to originate the loans and adjusted for the anticipated funding probability (pull-through rate). The fair value of interest rate lock commitments is classified as Level 3 in the fair value hierarchy.

The table below presents a reconciliation of derivative assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three- and six-months ended March 31, 2020 and 2019:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
(In thousands)	2020		2019		2020		2019
Beginning balance	$	2,921	$	658	$	3,269	$	380
Unrealized gains recognized in earnings,
net of settlements		2,757		1,047		2,409		1,325

Ending balance	$	5,678	$	1,705	$	5,678	$	1,705

The realized and unrealized gains recognized in earnings in the table above are included in mortgage banking income on the accompanying consolidated statements of income. Gains recognized in earnings for the three-month periods ended March 31, 2020 and 2019 attributable to Level 3 derivative assets held at the balance sheet date were $5.7 million and $1.7 million, respectively. Gains recognized in earnings for the six-month periods ended March 31, 2020 and 2019 attributable to Level 3 derivative assets held at the balance sheet date were $5.7 million and $1.7 million, respectively.

The table below presents information about significant unobservable inputs (Level 3) used in the valuation of derivative financial instruments measured at fair value on a recurring basis as of March 31, 2020 and September 30, 2019.

Financial Instrument

Significant

Unobservable Inputs

Range of Inputs

March 31,

2020

Range of Inputs
September 30,

2019

Interest rate lock commitments

Pull-through rate

25% - 100%

55% - 100%

Direct costs to close

Mortgage Servicing Rights. The current market for MSRs is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses a discounted cash flow valuation model from an independent third party to determine the fair value of MSRs. The discounted cash flow model approach consists of projecting expected servicing cash flows and calculating the present value. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds, discount rates and loan servicing costs. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the valuation hierarchy. A reconciliation of MSRs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) and a summary of the significant unobservable inputs used in the MSR valuation is presented in Note 3. Changes in the fair value of MSRs are included in mortgage banking income in the accompanying consolidated statements of income.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

Impaired loans are measured at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of the collateral if the loan is a collateral-dependent loan. At March 31, 2020 and September 30, 2019, all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. The appraisals are generally then discounted by management in order to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. At March 31, 2020 and September 30, 2019, the significant unobservable inputs used in the fair value measurement of impaired loans included discounts from appraised value ranging from 0.0% to 90% and estimated costs to sell the collateral ranging from 0.0% to 12.0%. During the three-month periods ended March 31, 2020 and 2019, the Company recognized provisions for loan losses of $1.8 million and $379,000, respectively, for impaired loans. During the six-month periods ended March 31, 2020 and 2019, the Company recognized provisions for loan losses of $1.9 million and $546,000, respectively, for impaired loans.

SBA Loan Servicing Rights. SBA loan servicing rights represent the value associated with servicing SBA loans that have been sold. The fair value of SBA loan servicing rights is determined on a quarterly basis by an independent third party valuation model using market-based discount rate and prepayment assumptions, and is classified as Level 3 in the fair value hierarchy. At March 31, 2020, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 7.73% to 16.13% with a weighted average of 12.49% and prepayment speed assumptions ranging from 9.02% to 23.97% with a weighted average rate of 16.16%. At September 30, 2019, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 6.82% to 26.61% with a weighted average of 11.11% and prepayment speed assumptions ranging from 6.80% to 21.17% with a weighted average rate of 14.10%. Impairment of the SBA loan servicing rights is recognized on a quarterly basis through a valuation allowance to the extent that fair value is less than the carrying amount. The Company recognized $193,000 and $223,000 of impairment charges on loan servicing rights for the three- and six-month periods ended March 31, 2020, respectively. The Company did not recognize any impairment charges on loan servicing rights for the three- and six-month periods ended March 31, 2019.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Other Real Estate Owned. Other real estate owned held for sale is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of other real estate owned is classified as Level 3 in the fair value hierarchy.

Other real estate owned is reported at fair value, less estimated costs to dispose of the property. The fair values are determined by real estate appraisals, which are then generally discounted by management in order to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the property. At March 31, 2020, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 15.0% to 30.9% with a weighted average of 30.1%. At September 30, 2019, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 0.0% to 15.0% with a weighted average of 10.5%. The Company did not recognize any charges to write down other real estate owned to fair value for the three- and six-month periods ended March 31, 2020 and 2019.

Transfers Between Categories. As previously described, management used different valuation methodologies related to SBA loans held for sale at March 31, 2020 and September 30, 2019, resulting in a change in classification from Level 2 to Level 3 for those types of instruments. Other than that change, there were no transfers into or out of Levels 1, 2, or 3 of the fair value hierarchy for the three- and six-month periods ended March 31, 2020 and 2019.

Financial Instruments Recorded Using Fair Value Option. Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis, with changes in fair value reported in income. The election is made at the acquisition date of an eligible financial asset or financial liability, and may not be revoked once made.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The Company has elected the fair value option for substantially all of its residential mortgage loans held for sale effective July 1, 2018, including all loans originated by the Company’s wholesale lending division. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due, nor were any on nonaccrual status, as of March 31, 2020 and September 30, 2019.

The table below presents the difference between the aggregate fair value and the aggregate remaining principal balance for residential mortgage loans held for sale for which the fair value option had been elected as of March 31, 2020 and September 30, 2019.

(In thousands)

Aggregate

Fair Value March 31, 2020

Aggregate Principal Balance March 31, 2020

Difference

Residential mortgage loans held for sale

139,084

134,280

4,804

(In thousands)

Aggregate

Fair Value September 30, 2019

Aggregate Principal Balance September 30, 2019

Difference

Residential mortgage loans held for sale

80,457

77,787

2,670

The table below presents gains and losses and interest included in earnings related to financial assets measured at fair value under the fair value option for the three- and six-month periods ended March 31, 2020 and 2019:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
(In thousands)	2020		2019		2020		2019
Gains – included in mortgage banking income	$	980	$	437	$	3,356	$	1,026
Interest income		950		187		1,841		341

	$	1,930	$	624	$	5,197	$	1,367

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

GAAP requires disclosure of fair value information about financial instruments for interim reporting periods, whether or not recognized in the consolidated balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The carrying amounts and estimated fair values of the Company's financial instruments are as follows.

	Carrying		Fair Value Measurements Using:
	Amount		Level 1		Level 2		Level 3
			(In thousands)
March 31, 2020:
Financial assets:
Cash and due from banks	$	11,790	$	11,790	$	-	$	-
Interest-bearing deposits with banks		10,813		10,813		-		-
Interest-bearing time deposits		2,510		-		2,510		-
Securities available for sale		184,684		-		184,684		-
Securities held to maturity		2,189		-		2,521		-
Residential mortgage loans held for sale		139,084		-		139,084		-
SBA loans held for sale		24,843		-		-		27,409
Loans, net		877,276		-		-		934,710
FRB and FHLB stock		16,618		N/A		N/A		N/A
Accrued interest receivable		5,157		-		5,157		-
SBA loan servicing rights (included in other assets)		2,891		-		-		2,891
Residential mortgage loan servicing rights (included in other assets)		4,055		-		-		4,055
Derivative assets (included in other assets)		5,708		-		30		5,678
Equity securities (included in other assets)		58		58		-		-

Financial liabilities:
Deposits		937,306		-		-		939,967
Borrowings from FHLB		270,000		-		272,292		-
Subordinated note		19,763		-		22,015		-
Accrued interest payable		787		-		787		-
Advance payments by borrowers for taxes and insurance		1,985		-		1,985		-
Derivative liabilities (included in other liabilities)		7,420		-		7,420		-

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)


	Carrying		Fair Value Measurements Using:
	Amount		Level 1		Level 2		Level 3
				(In thousands)
September 30, 2019:
Financial assets:
Cash and due from banks	$	13,008	$	13,008	$	-	$	-
Interest-bearing deposits with banks		28,424		28,424		-		-
Interest-bearing time deposits		2,265		-		2,265		-
Securities available for sale		177,302		-		177,302		-
Securities held to maturity		2,336		-		2,670		-
Residential mortgage loans held for sale		80,457		-		80,457		-
SBA loans held for sale		15,613		-		17,040		-
Loans, net		810,658		-		-		841,646
FRB and FHLB stock		13,040		N/A		N/A		N/A
Accrued interest receivable		5,041		-		5,041		-
SBA Loan servicing rights (included in other assets)		3,030		-		-		3,030
Residential mortgage loan servicing rights (included in other assets)		934		-		-		934
Derivative assets (included in other assets)		3,399		-		130		3,269
Equity securities (included in other assets)		85		85		-		-

Financial liabilities:
Deposits		834,384		-		-		835,384
Federal funds purchased		4,000		-		4,000		-
Borrowings from FHLB		222,544		-		222,432		-
Subordinated note		19,729		-		21,143		-
Accrued interest payable		935		-		935		-
Advance payments by borrowers for taxes and insurance		1,906		-		1,906		-
Derivative liabilities (included in other liabilities)		329		-		329		-

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Employee Stock Ownership Plan

On October 6, 2008, the Company established a leveraged employee stock ownership plan (“ESOP”) covering substantially all employees. The ESOP trust acquired 203,363 shares of Company common stock at a cost of $10.00 per share financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements because the debt is serviced from Company contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts or by utilizing the dividends as additional debt service on the ESOP loan. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to participant accounts based on the ratio of the current year principal and interest payments to the total of the current year and future years’ principal and interest to be paid on the employer loan. Compensation expense is recognized based on the average fair value of shares released for allocation to participant accounts during the year with a corresponding credit to stockholders’ equity. The ESOP loan was repaid in full during the quarter ended December 31, 2015 and all shares have been allocated to participants in the plan; therefore, no compensation expense was recognized for the three- and six-month periods ended March 31, 2020 and 2019. The ESOP trust held 124,117 and 136,219 shares of Company common stock at March 31, 2020 and September 30, 2019, respectively.

Stock Based Compensation Plans

The Company maintains two equity incentive plans under which stock options and restricted stock have been or may be granted, the 2010 Equity Incentive Plan (“2010 Plan”), approved by the Company’s shareholders in February 2010, and the 2016 Equity Incentive Plan (“2016 Plan”), approved by the Company’s shareholders in February 2016. The aggregate number of shares of the Company’s common stock available for issuance under the 2016 Plan may not exceed 88,000 shares, consisting of 66,000 stock options and 22,000 shares of restricted stock. At March 31, 2020, there were no remaining shares of the Company’s common stock available for issuance under the 2010 Plan. At March 31, 2020, 7,255 shares of the Company’s common stock were available for issuance under the 2016 Plan, all of which were available for stock options. There are no restricted stock shares available for issuance under the 2016 Plan as of March 31, 2020. The Company accounts for any forfeitures as they occur, and any previously recognized compensation cost for an award is reversed in the period the award is forfeited.

Stock Options

Under the plans, the Company may grant both non-statutory and incentive stock options that may not have a term exceeding ten years. In the case of incentive stock options, the aggregate fair value (determined at the time the incentive stock options are granted) which are first exercisable during any calendar year shall not exceed $100,000. Exercise prices generally may not be less than the fair market value of the underlying stock at the date of the grant. The terms of the plans also include provisions whereby all unearned options and restricted shares become immediately exercisable and fully vested upon a change in control.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Stock options granted generally vest ratably over five years and are exercisable in whole or in part for a period up to ten years from the date of the grant. Compensation expense is measured based on the fair market value of the options at the grant date and is recognized ratably over the period during which the shares are earned (the vesting period). The fair market value of stock options granted is estimated at the date of grant using a binomial option pricing model. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted represents the period of time that options are expected to be outstanding. The risk free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the grant date.

The fair value of options granted during the six-month period ended March 31, 2020 was determined using the following assumptions:

Expected dividend yield		1.75%
Risk-free interest rate		2.13%
Expected volatility		14.6%
Expected life of options		7.0 years
Weighted average fair value at grant date		$6.13

A summary of stock option activity as of March 31, 2020, and changes during the six-month period then ended is presented below.

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)			Aggregate Intrinsic Value
	(Dollars in thousands, except per share data)
Outstanding at beginning of period		84,806		$	34.13
Granted		11,958			66.35
Exercised		(28,361	)		14.01
Forfeited or expired		-			-
Outstanding at end of period		68,403		$	48.11		7.4	$	-
Vested and expected to vest		68,403		$	48.11		7.4	$	-
Exercisable at end of period		29,067		$	42.04		6.8	$	-

The intrinsic value of stock options exercised during the six-month period ended March 31, 2020 was $1.4 million. The intrinsic value of stock options exercised during the six-month period ended March 31, 2019 was $2.4 million. The Company recognized compensation expense related to stock options of $22,000 and $42,000 for the three- and six-month periods ended March 31, 2020, respectively. The Company recognized compensation expense related to stock options of $17,000 and $35,000 for the three- and six-month periods ended March 31, 2019, respectively. At March 31, 2020, there was $205,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over a weighted average period of 2.92 years. Cash received from the exercise of stock options and the tax benefit from the exercise of stock options were $148,000 and $134,000, respectively, for the six-month period ended March 31, 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Restricted Stock

The vesting period of restricted stock granted under the plans is generally five years beginning one year after the date of grant of the awards. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the vesting period. Compensation expense related to restricted stock recognized for the three- and six-month periods ended March 31, 2020 was $49,000 and $96,000, respectively. Compensation expense related to restricted stock recognized for the three and six-month periods ended March 31, 2019 was $44,000 and $85,000, respectively.

A summary of the Company’s nonvested restricted shares activity as of March 31, 2020 and changes during the six-month period then ended is presented below.

	Number of Shares			Weighted Average Grant Date Fair Value
Nonvested at October 1, 2019		13,458		$	44.62
Granted		1,436		$	66.35
Vested		(4,086	)	$	43.24
Forfeited		-			-
Nonvested at March 31, 2020		10,808		$	48.04

There were 4,086 restricted shares vested during the six-month period ended March 31, 2020 with a total fair value of $271,000. There were 3,653 restricted shares that vested during the six-month period ended March 31, 2019 with a total fair value of $216,000. At March 31, 2020, there was $446,000 of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over a weighted average period of 2.78 years.

10.

Derivative Financial Instruments

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitment). The Company also enters into forward mortgage loan commitments to sell loans to various investors to protect itself against exposure to various factors and to reduce sensitivity to interest rate movements. Both the interest rate lock commitments and the related forward mortgage loan sales contracts are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in mortgage banking income in the accompanying consolidated statements of income. All such derivatives are considered stand-alone derivatives and have not been formally designated as hedges by management.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Certain financial instruments, including derivatives, may be eligible for offset in the balance sheet when the “right of setoff” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements. However, the Company has not elected to offset such financial instruments in the consolidated balance sheets. The Company may be required to post margin collateral to derivative counterparties based on agreements with the dealers. At March 31, 2020, the Company had cash collateral posted with certain derivative counterparties of $7.1 million against its derivative obligations. The Company had no cash collateral posted with derivative counterparties at September 30, 2019. Cash collateral related to derivative contracts is recorded in other liabilities in the consolidated balance sheets.

The tables below provide information on the Company’s derivative financial instruments as of March 31, 2020 and September 30, 2019.

(In thousands)	Notional Amount March 31, 2020		Asset Derivatives March 31, 2020		Liability Derivatives March 31, 2020
Interest rate lock commitments	$	392,638	$	5,678	$	-
Forward mortgage loan sale contracts		291,250		30		7,420

	$	683,888	$	5,708	$	7,420

(In thousands)	Notional Amount September 30, 2019		Asset Derivatives September 30, 2019		Liability Derivatives September 30, 2019
Interest rate lock commitments	$	258,545	$	3,269	$	-
Forward mortgage loan sale contracts		203,250		130		329

	$	461,795	$	3,399	$	329

Income (loss) related to derivative financial instruments included in mortgage banking income in the accompanying consolidated statements of income for the three- and six-month periods ended March 31, 2020 and 2019 is as follows:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(In thousands)	2020			2019			2020			2019
Interest rate lock commitments	$	2,757		$	1,047		$	2,409		$	1,325
Forward mortgage loan sale contracts		(10,380	)		(624	)		(10,817	)		(775	)

	$	(7,623	)	$	423		$	(8,408	)	$	550

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

11.

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. Under the Basel III rules, the Bank must hold a conservation buffer above the adequately capitalized risk-based capital ratios disclosed in the table below. The capital conservation buffer was phased in from 0.0% for 2015 to 2.5% for 2019. The capital conservation buffer was 1.875% for 2018 and 2.5% for 2019. The Bank met all capital adequacy requirements to which it was subject as of March 31, 2020 and September 30, 2019.

As of March 31, 2020, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The Company’s and Bank’s actual capital amounts and ratios are also presented in the table. The Company is not subject to the Federal Reserve Bank’s consolidated capital requirements because it has less than $3 billion in total consolidated assets. However, management has elected to disclose the Company’s capital amounts and ratios in addition to the Bank’s required disclosures in the table below. No amount was deducted from capital for interest-rate risk at either date.

											Minimum
											To Be Well
						Minimum					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes:					Action Provisions:
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in thousands)
As of March 31, 2020:
Total capital (to risk-weighted assets):
Consolidated	$	134,721		12.48	%	$	86,356		8.00	%		N/A		N/A
Bank		125,723		11.67			86,150		8.00		$	107,687		10.00	%
Tier 1 capital (to risk-weighted assets):
Consolidated	$	103,267		9.57	%	$	64,767		6.00	%		N/A		N/A
Bank		114,032		10.59			64,612		6.00		$	86,150		8.00	%
Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	103,267		9.57	%	$	48,575		4.50	%		N/A		N/A
Bank		114,032		10.59			48,459		4.50		$	69,997		6.50	%
Tier 1 capital (to average adjusted total assets):
Consolidated	$	103,267		7.97	%	$	51,857		4.00	%		N/A		N/A
Bank		114,032		8.91			51,215		4.00		$	64,019		5.00	%

As of September 30, 2019:
Total capital (to risk-weighted assets):
Consolidated	$	130,700		13.85	%	$	75,474		8.00	%		N/A		N/A
Bank		121,160		12.88			75,249		8.00		$	94,061		10.00	%
Tier 1 capital (to risk-weighted assets):
Consolidated	$	100,931		10.70	%	$	56,606		6.00	%		N/A		N/A
Bank		111,120		11.81			56,437		6.00		$	75,249		8.00	%
Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	100,931		10.70	%	$	42,454		4.50	%		N/A		N/A
Bank		111,120		11.81			42,327		4.50		$	61,140		6.50	%
Tier 1 capital (to average adjusted total assets):
Consolidated	$	100,931		8.39	%	$	48,142		4.00	%		N/A		N/A
Bank		111,120		9.34			47,564		4.00		$	59,455		5.00	%

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

12.

Recent Accounting Pronouncements

The following are summaries of recently issued or adopted accounting pronouncements that impact the accounting and reporting practices of the Company:

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. Under the new guidance, lessor accounting is largely unchanged. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional, optional transition method related to implementing the new leases standard. ASU 2018-11 provides that companies can initially apply the new leases standard at adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has adopted the new leases standard on October 1, 2019, and as a result the Company recorded a right-of-use asset of $6.2 million, a lease liability of $6.3 million and a cumulative-effect adjustment of $166,000 to increase retained earnings. The Company has elected all applicable practical expedients permitted under the standard, including the option to expense short-term leases with a term of one year or less. The Company also utilized the transition method allowed under ASU 2028-11 and did not restate prior periods. See Note 15 for further details regarding adoption of the new leases standard.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The update commonly referred to as the current expected credit loss methodology (“CECL”) replaces the incurred loss methodology for recognizing credit losses under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. For the Company, the amendments in the update were originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption. Management expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses through retained earnings as of the beginning of the first reporting period in which the new standard is effective; however, the magnitude of the adjustment is unknown. In planning for the implementation of ASU 2016-13, management is currently evaluating software solutions, data requirements and loss methodologies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of ASU 2016-13 for smaller reporting companies (as defined by the SEC) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is a smaller reporting company as defined by the SEC, and currently does not intend to early adopt CECL.

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities. The update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the update requires the premium to be amortized to the earliest call date. The update does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. An entity should apply the amendments in this update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The adoption of this update effective October 1, 2019 did not have a material impact on the Company’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in the update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

13.

Segment Reporting

The Company’s operations include three primary segments: core banking, SBA lending, and mortgage banking. The core banking segment originates residential, commercial and consumer loans and attracts deposits from its customer base. Net interest income from loans and investments that are funded by deposits and borrowings is the primary revenue for the core banking segment. The SBA lending segment originates loans guaranteed by the SBA, subsequently selling the guaranteed portion to outside investors. Net gains on sales of loans and net interest income are the primary sources of revenue for the SBA lending segment. The mortgage banking segment originates residential mortgage loans and sells them in the secondary market. Net gains on the sales of loans, income from derivative financial instruments and net interest income are the primary sources of revenue for the mortgage banking segment.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The core banking segment is comprised primarily by the Bank and First Savings Investments, Inc., while the SBA lending segment’s revenues are comprised primarily of net interest income and gains on the sales of SBA loans generated by Q2. The mortgage banking segment operates as a separate division of the Bank and began operations in April 2018.

The following segment financial information has been derived from the internal financial statements of the Company which are used by management to monitor and manage financial performance. The accounting policies of the three segments are the same as those of the Company. The amounts reflected in the “Other” column in the tables below represent combined balances of the Company and the Captive, and are the primary differences between the sum of the segment amounts and consolidated totals, along with amounts to eliminate transactions between segments.

	Core Banking		SBA Lending			Mortgage Banking			Other			Consolidated Totals
	(In thousands)
Three Months Ended March 31, 2020:
Net interest income (loss)	$	9,536	$	1,151		$	523		$	(300	)	$	10,910
Provision for loan losses		216		1,489			-			-			1,705
Net interest income (loss) after provision		9,320		(338	)		523			(300	)		9,205
Net gains on sales of loans, SBA		-		1,229			-			-			1,229
Mortgage banking income		3		-			8,269			-			8,272
Noninterest income		1,411		1,209			8,374			-			10,994
Noninterest expense (income)		6,062		1,841			14,261			(89	)		22,075
Income (loss) before taxes		4,669		(970	)		(5,364	)		(211	)		(1,876	)
Income tax expense (benefit)		901		(124	)		(1,341	)		(210	)		(774	)
Segment profit (loss)		3,768		(846	)		(4,023	)		(1	)		(1,102	)
Non cash items:
Depreciation and amortization		279		14			42			17			352
Segment assets at March 31, 2020		1,197,685		106,296			161,134			(96,863	)		1,368,252

	Core Banking		SBA Lending			Mortgage Banking			Other			Consolidated Totals
	(In thousands)
Six Months Ended March 31, 2020:
Net interest income (loss)	$	19,021	$	2,368		$	1,010		$	(597	)	$	21,802
Provision for loan losses		736		1,474			-			-			2,210
Net interest income (loss) after provision		18,285		894			1,010			(597	)		19,592
Net gains on sales of loans, SBA		-		1,990			-			-			1,990
Mortgage banking income		4		-			24,085			-			24,089
Noninterest income		2,802		2,138			24,180			-			29,120
Noninterest expense (income)		13,691		3,666			29,163			(173	)		46,347
Income (loss) before taxes		7,396		(634	)		(3,973	)		(424	)		2,365
Income tax expense (benefit)		1,334		(81	)		(993	)		(396	)		(136	)
Segment profit (loss)		6,062		(553	)		(2,980	)		(28	)		2,501
Non cash items:
Depreciation and amortization		621		27			79			34			761
Segment assets at March 31, 2020		1,197,685		106,296			161,134			(96,863	)		1,368,252

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

	Core Banking			SBA Lending			Mortgage Banking		Other			Consolidated Totals
	(In thousands)
Three Months Ended March 31, 2019:
Net interest income (loss)	$	9,126		$	934		$	110	$	(309	)	$	9,861
Provision (credit) for loan losses		(492	)		832			-		-			340
Net interest income (loss) after provision		9,618			102			110		(309	)		9,521
Net gains on sales of loans, SBA		-			521			-		-			521
Mortgage banking income		3			-			5,071		-			5,074
Noninterest income		1,337			673			5,079		-			7,089
Noninterest expense (income)		6,998			1,322			4,563		(3	)		12,880
Income (loss) before taxes		3,957			(547	)		626		(306	)		3,730
Income tax expense (benefit)		694			(70	)		176		(334	)		466
Segment profit (loss)		3,263			(477	)		450		28			3,264
Non cash items:
Depreciation and amortization		323			12			23		18			376
Segment assets at March 31, 2019		1,093,766			80,521			27,346		(71,911	)		1,129,722

		Core Banking			SBA Lending			Mortgage Banking		Other			Consolidated Totals
		(In thousands)
Six Months Ended March 31, 2019:
Net interest income (loss)	$	17,863		$	1,842		$	341	$	(609	)	$	19,437
Provision (credit) for loan losses		(508	)		1,163			-		-			655
Net interest income (loss) after provision		18,371			679			341		(609	)		18,782
Net gains on sales of loans, SBA		-			1,485			-		-			1,485
Mortgage banking income		30			-			8,333		-			8,363
Noninterest income		2,716			1,810			8,344		-			12,870
Noninterest expense (income)		13,603			2,684			8,031		(22	)		24,296
Income (loss) before taxes		7,484			(195	)		654		(587	)		7,356
Income tax expense (benefit)		1,319			(25	)		163		(469	)		988
Segment profit (loss)		6,165			(170	)		491		(118	)		6,368
Non cash items:
Depreciation and amortization		759			24			43		34			860
Segment assets at March 31, 2019		1,093,766			80,521			27,346		(71,911	)		1,129,722

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

14.

Revenue from Contracts with Customers

Substantially all of the Company’s revenue from contracts with customers within the scope of FASB ASC 606 is included in the core banking segment and is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three- and six-month periods ended March 31, 2020 and 2019:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2020		2019		2020		2019
			(In thousand)
Service charges on deposit accounts	$	441	$	449	$	950	$	960
ATM and interchange fees		524		446		1,027		899
Investment advisory income		83		77		110		134
Other		31		43		57		80
Revenue from contracts with customers		1,079		1,015		2,144		2,073

Gain (loss) on sale of securities		7		1		7		1
Gain on sale of SBA loans		1,229		521		1,990		1,485
Mortgage banking income		8,272		5,074		24,089		8,363
Increase in cash value of life insurance		194		147		356		258
Real estate lease income		152		157		303		315
Other		61		174		231		375
Other noninterest income		9,915		6,074		26,976		10,797

Total noninterest income	$	10,994	$	7,089	$	29,120	$	12,870

A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as wire fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

ATM and Interchange Fees: The Company earns ATM usage fees and interchange fees from debit cardholder transactions conducted through a payment network. ATM fees are recognized when the transaction occurs. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Investment Advisory Income: The Company earns trust, insurance commissions, brokerage commissions and annuities income from its contracts with customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized when the transaction is executed. Other related fees, which are based on a fixed fee schedule, are recognized when the services are rendered.

Other Income: Other income from contracts with customers includes check cashing and cashier’s check fees, safe deposit box fees and cash advance fees. This revenue is recognized at the time the transaction is executed or over the period the Company satisfies the performance obligation.

15.

Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company is a lessor in certain leasing agreements, such as for office space, and is a lessee in others, such as for certain office space and equipment. The Company’s operating leases have terms that expire at different dates through August 2028, and some include options to extend the leases in five year increments.

On October 1, 2019, the Company adopted FASB ASC 842 and all subsequent updates that modified FASB ASC 842. For the Company, this update primarily affected the accounting treatment for operating lease agreements. With the adoption of FASB ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a “right of use” (“ROU”) asset and a corresponding lease liability. All of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet.

The Company’s right to use an asset over the life of a lease is recorded as an ROU asset included in other assets on the consolidated balance sheet and was $7.0 million at March 31, 2020. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. The Company recorded a lease liability in other liabilities on the consolidated balance sheet, which had a balance of $7.1 million at March 31, 2020.

The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of minimum lease payments. Regarding the discount rate, FASB ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of October 1, 2019 was used.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the term of the lease. Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of renewal options on operating leases is at the Company’s sole discretion, and certain leases may include options to purchase the leased property. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company does not enter into lease agreements which contain material residual value guarantees or material restrictive covenants. At March 31, 2020, the Company had not entered into any leases that had yet to commence.

Lease expense for the three-and six-month periods ended March 31, 2019 was $283,000 and $551,000, respectively. The components of lease expense for the three- and six-month periods ended March 31, 2020 were as follows:

	Three Months Ended		Six Months Ended
	March 31, 2020		March 31, 2020
Operating lease cost	$	295	$	585
Short-term lease cost		195		315
	$	490	$	900

Future minimum commitments due under these lease agreements as of March 31, 2020 are as follows, including renewal options that are reasonably certain to be exercised:

2020 (remaining six months)	$	629
2021		941
2022		758
2023		610
2024		502
Thereafter		5,897
Total lease payments		9,337
Less imputed interest		(2,255	)
Total	$	7,082

The lease term and discount rate at March 31, 2020 were as follows:

Weighted-average remaining lease term (years)		20.4
Weighted-average discount rate		2.58	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Supplemental cash flow information for the six-month period ended March 31, 2020 related to leases was as follows:

	Six Months Ended
	March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	524

ROU assets obtained in exchange for lease obligations:
Operating leases	$	7,506

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company's actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, the scope, duration and severity of the COVID-19 pandemic and its effects on our business and operations, our customers, including their ability to make timely payments on loans, our service providers, and on the economy and financial markets, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed herein and in our Annual Report on Form 10-K for the year ended September 30, 2019 under “Part II, Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

During the six-month period ended March 31, 2020, there was no significant change in the Company's critical accounting policies or the application of critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended September 30, 2019.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 pandemic has placed significant health, economic and other major hardships throughout the communities we serve, the United States and the entire world. The outbreak of COVID-19, or any other such outbreak of a highly contagious disease, occurring in the United States could negatively affect our business operations, asset valuations, financial condition and results of operations.

The Company has implemented a number of procedures in response to the pandemic to support the safety and well-being of our customers, employees, and communities:

Following the guidelines of the Center for Disease Control and local governments, we have updated our branch operating procedures. While our branches remain open, the lobbies have been closed and transactions are being conducted through drive-up windows or by appointment. For employees that continue to work from our offices, we have enhanced daily cleaning of our facilities and have instructed them to maintain appropriate social distancing. We also actively encourage customers to utilize alternative channels such as our online and mobile banking platforms. Our customer service and retail departments remain fully staffed and available to assist customers remotely.

We have expanded our use of technology to allow many of our employees to work safely and productively from home. Most of our normally scheduled meetings, including Board of Director meetings and various committee meetings, are now held virtually instead of in-person.

We are assisting our customers experiencing COVID-19 related hardships by approving payment extensions or loan forbearance agreements, and waiving or refunding certain fees. As of May 8, 2020, we had approved payment extensions or loan forbearance agreements on approximately $86.1 million of balances in the loan portfolio, of which $77.7 million related to commercial real estate, $5.8 million related to residential real estate and consumer loans, and $2.6 million related to SBA lending relationships. These payment extensions or loan forbearance agreements are generally for periods of three months or less.

As a result of the passage of the CARES Act, the SBA will make six months of principal and interest payments for loans of existing SBA borrowers that were in “regular servicing status” (not delinquent) at March 27, 2020 and for SBA loans of new borrowers originated between March 27, 2020 and September 27, 2020. The aforementioned $2.6 million of SBA lending relationships that were provided payment extensions and forbearance by the Company will also receive the six months of SBA-made payments once the forbearance periods have expired. In addition, the majority of the Company’s SBA borrowers applied for participation in the SBA’s Paycheck Protection Program (“PPP”).

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

We are actively participating in the PPP and had received SBA authorizations for 652 customers totaling approximately $194.4 million for PPP loans as of May 8, 2020. These loans will be disbursed as soon as administratively feasible during the third fiscal quarter of 2020. We anticipate that the majority of the fee income associated with the origination of these loans to be recognized in the fourth fiscal quarter of 2020.

The Company had outstanding loan balances to restaurants and hotels with aggregate balances of $92.0 million and $16.9 million, respectively as of March 31, 2020. Of the $92.0 million balance of loans to restaurants, $72.3 million represents commercial real estate loans where the collateral property is leased to national-brand, investment-grade tenants and $5.2 million is fully guaranteed by the SBA. Of the $16.9 million balance of loans to hotels, $3.1 million is fully guaranteed by the SBA. The leisure and hospitality industries carry a higher degree of credit risk due to the COVID-19 pandemic. Based on our evaluation at March 31, 2020, management believes the allowance for loan losses is adequate to cover estimated losses at that date. However, as the pandemic continues, additional losses could be recognized.

Management continues to closely monitor the pandemic and will take additional action to respond to the pandemic as the situation continues to evolve. We cannot determine or estimate the impact on our business at this time because the length and severity of the economic downturn is not known. We are committed to continuing to serve our customers, employees and communities.

Comparison of Financial Condition at March 31, 2020 and September 30, 2019

Cash and Cash Equivalents. Cash and cash equivalents decreased $18.8 million from $41.4 million at September 30, 2019 to $22.6 million at March 31, 2020.

Loans. Net loans receivable increased $66.6 million, from $810.7 million at September 30, 2019 to $877.3 million at March 31, 2020, due primarily to increases in commercial real estate loans of $47.3 million.

Loans Held for Sale. Loans held for sale increased $67.8 million, from $96.1 million at September 30, 2019 to $163.9 million at March 31, 2020, due to an increase in residential mortgage loans held for sale of $58.6 million and an increase in SBA loans held for sale of $9.2 million. The increase in residential mortgage loans held for sale is due to additional staff hired in 2019 and 2020 for the purpose of expanding the Company’s mortgage banking activities. As a result of this expansion, the Company originated $1.08 billion of residential loans held for sale in the secondary market for the six-month period ended March 31, 2020 compared to $177.1 million in originations for the six-month period ended March 31, 2019.

Securities Available for Sale. Securities available for sale increased $7.4 million, from $177.3 million at September 30, 2019 to $184.7 million at March 31, 2020, due primarily to purchases of $27.4 million, partially offset by calls and maturities of $4.1 million, sales of $3.2 million, principal repayments of $3.7 million, and a decrease in unrealized gains on securities available for sale of $8.7 million. See additional discussion regarding pricing of the available for sale securities portfolio in the “Equity” section below.

Securities Held to Maturity. Investment securities held to maturity decreased $147,000 from September 30, 2019 to March 31, 2020 due to partial calls and principal repayments. There were no purchases of securities held to maturity during the six-month period ended March 31, 2020.

Deposits. Total deposits increased $102.9 million, from $834.4 million at September 30, 2019 to $937.3 million at March 31, 2020, due primarily to increases in interest bearing deposit accounts and non-interest bearing deposit accounts of $97.1 million and $5.8 million, respectively. The increase in interest bearing deposit accounts is primarily due to an increase of $73.6 million in brokered time deposits.

Borrowings. Borrowings from the FHLB increased $47.5 million, from $222.5 million at September 30, 2019 to $270.0 million at March 31, 2020. The increase in borrowings was primarily used to fund loan growth and the expansion of the Company’s mortgage lending activities.

Equity. Stockholders’ equity attributable to the Company was $116.7 million at March 31, 2020, a decrease of $4.4 million from September 30, 2019 due primarily to a $6.8 million decrease in accumulated other comprehensive income due to a decline in the market value of available for sale securities, partially offset by an increase in retained earnings of $2.2 million. The Company obtains pricing for its available for sale securities portfolio from an independent third party pricing service approximately 10 days prior to each month end. Due to significant market movements at the end of March 2020 in response to COVID-19, the values obtained for the available for sale securities portfolio showed a significant decrease in unrealized gains. However, based on changes in the market subsequent to the valuation date management believes the decrease in the unrealized gain on the available for sale securities portfolio would have been partially mitigated at March 31, 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended March 31, 2020 and 2019

Overview. The Company reported a net loss of $627,000, or a net loss of $0.26 per diluted share, for the three-month period ended March 31, 2020 compared to net income of $3.5 million, or $1.50 per diluted share, for the three-month period ended March 31, 2019.

The net loss of $627,000 for the quarter ended March 31, 2020 was primarily the result of a $4.0 million net loss recorded for the mortgage banking segment and provision for loan losses of $1.7 million during the period. The net loss for the mortgage banking segment is primarily the result of unfavorable market value movements related to forward mortgage loan sale contracts, interest rate lock commitments, loans held for sale and mortgage servicing assets towards the end of the quarter and due primarily to market disruptions arising from the COVID-19 pandemic. Stimulus packages enacted by the Federal Reserve Bank, which included the purchase of $525 billion of agency mortgage-backed securities (”MBS”), the vehicle used by the Company to hedge the locked pipeline, caused a decrease in the valuation of the MBS market and as a result, a significant increase in derivative liabilities related to the Company’s forward mortgage loan sale contracts. In addition, stress within the mortgage servicing market, caused by liquidity issues and concerns regarding the length and commitment of deferral periods for residential mortgage payments, caused nearly all investors and servicing companies to withdraw participation from the mortgage purchase and servicing market in late March 2020. These withdrawals caused a reduction in the fair market values of the Company’s interest rate lock commitments, mortgage loans held for sale and mortgage servicing assets. The increase in the provision for loan losses included changes to qualitative factors within the allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.

Net Interest Income. Net interest income increased $1.0 million, or 10.6%, for the three-month period ended March 31, 2020 as compared to the same period in 2019. Average interest-earning assets increased $167.2 million and average interest-bearing liabilities increased $156.0 million when comparing the two periods. The tax-equivalent net interest margin was 3.73% for 2020 compared to 3.92% for 2019.

Total interest income increased $1.4 million, or 11.3%, when comparing the two periods due primarily to an increase in the average balance of interest-earning assets of $167.2 million, from $1.04 billion for 2019 to $1.20 billion for 2020, partially offset by a decrease in the average tax equivalent yield on interest-earning assets from 4.86% for 2019 to 4.65% for 2020. The majority of the increase in average interest-earning assets was attributable to loans. The average balance of loans increased $167.4 million, or 20.9%, compared to 2019.

Total interest expense increased $337,000, or 13.8%, due to an increase in the average balance of interest-bearing liabilities of $156.0 million, from $828.2 million for 2019 to $984.2 million for 2020, which was partially offset by a decrease in the average cost of interest-bearing liabilities from 1.18% for 2019 to 1.13% for 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Average Balance Sheets. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs for the three-month periods ended March 31, 2020 and 2019. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances presented are daily averages. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans and investment securities have been adjusted to a tax equivalent basis using a federal marginal tax rate of 21%.

	Three Months Ended March 31,
	2020								2019
	Average Balance		Interest and Dividends			Yield/ Cost			Average Balance		Interest and Dividends			Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-bearing deposits with banks	$	48,306	$	153			1.27	%	$	36,317	$	221			2.43	%
Loans		970,083		11,875			4.90			802,652		10,227			5.10
Investment securities		158,116		1,728			4.37			161,170		1,819			4.51
Agency mortgage-backed securities		10,870		76			2.80			24,682		179			2.90
FRB and FHLB stock		14,878		151			4.06			10,196		142			5.57
Total interest-earning assets		1,202,253		13,983			4.65			1,035,017		12,588			4.86

Noninterest-earning assets		107,096								71,261
Total assets	$	1,309,349							$	1,106,278

Liabilities and equity:
NOW accounts	$	185,809	$	137			0.29	%	$	176,596	$	113			0.26	%
Money market deposit accounts		110,500		244			0.88			112,839		360			1.28
Savings accounts		122,719		24			0.08			119,593		23			0.08
Time deposits		297,023		1,220			1.64			284,099		1,111			1.56
Total interest-bearing deposits		716,051		1,625			0.91			693,127		1,607			0.93

Repurchase agreements		-		-			0.00			1,353		1			0.30
Fed funds purchased		143		-			0.00			-		-			0.00
FHLB borrowings		248,205		838			1.35			114,044		520			1.82
Other borrowings (1)		19,752		320			6.48			19,684		318			6.46
Total interest-bearing liabilities		984,151		2,783			1.13			828,208		2,446			1.18

Noninterest-bearing deposits		174,951								161,737
Other noninterest-bearing liabilities		24,772								10,573
Total liabilities		1,183,874								1,000,518

Total stockholders’ equity		125,462								104,275
Noncontrolling interest in subsidiary		13								1,485
Total equity		125,475								105,760

Total liabilities and equity	$	1,309,349							$	1,106,278
Net interest income (taxable equivalent basis)				11,200								10,142
Less: taxable equivalent adjustment				(290	)							(281	)
Net interest income			$	10,910							$	9,861
Interest rate spread							3.52	%							3.68	%
Net interest margin							3.73	%							3.92	%
Average interest-earning assets to average interest-bearing liabilities							122.16	%							124.97	%

(1) Includes subordinated debt.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income on a tax equivalent basis for the three-month periods ended March 31, 2020 and 2019. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.

	Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
	Increase (Decrease) Due to
	Rate			Volume			Net
					(In thousands)
Interest income:
Interest-bearing deposits with banks	$	(124	)	$	56		$	(68	)
Loans		(443	)		2,091			1,648
Investment securities		(57	)		(34	)		(91	)
Agency mortgage-backed securities		(5	)		(98	)		(103	)
FRB and FHLB stock		(47	)		56			9
Total interest-earning assets		(676	)		2,071			1,395

Interest expense:
Deposits		(37	)		55			18
Repurchase agreements		-			(1	)		(1	)
Borrowings from FHLB		(214	)		532			318
Subordinated debt		-			1			2
Total interest-bearing liabilities		(250	)		587			337

Net increase (decrease) in net interest income (tax equivalent basis)	$	(426	)	$	1,484		$	1,058

Provision for Loan Losses. The provision for loan losses was $1.7 million for the three-month period ended March 31, 2020 compared to $340,000, for the same period in 2019. Gross loans increased approximately $26.7 million for the three-month period ended March 31, 2020 compared to an increase of approximately $28.9 million for the three-month period ended March 31, 2019.

The Company recognized net charge-offs of $544,000 for the three-month period ended March 31, 2020, of which $402,000 was related to unguaranteed portions of SBA loans. The Company recognized net charge-offs of $26,000 for the same period in 2019. The increase in the provision for loan losses for 2020 was primarily due to increased nonperforming assets and net charge-offs for the period, as well as changes to qualitative factors within the allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Noninterest Income. Noninterest income increased $3.9 million for the three months ended March 31, 2020 as compared to the same period in 2019. The increase was due primarily to an increase in mortgage banking income of $3.2 million and a $708,000 increase in net gain on sales of SBA loans. The increase in mortgage banking income is due to production from the secondary-market residential mortgage lending segment that commenced operations in April 2018. The Company’s SBA lending activities are performed under Q2, which specializes in the origination and servicing of SBA loans. The Bank owns 51% of Q2 with the option to purchase the minority interest in September 2020. Gross revenues and expenses related to Q2 are reported in the consolidated statements of income, and the net income or net loss attributable to noncontrolling interests is then subtracted from (in the case of net income) or added to (in the case of net loss) net income to arrive at net income attributable to the Company. Additional details regarding the financial performance of the mortgage banking and SBA lending segments are included in Note 13 to the consolidated financial statements.

Noninterest Expense. Noninterest expense increased $9.2 million for the three months ended March 31, 2020 as compared to the same period in 2019. The increase was due primarily to increases in compensation and benefits and advertising of $6.7 million and $1.2 million, respectively. The increase in compensation and benefits expense is attributable to the addition of new employees to support the growth of the Company, primarily its mortgage banking and SBA lending activities, and normal salary and benefits adjustments. The increase in advertising is primarily due to the mortgage banking segment.

Income Tax Expense. The Company recognized an income tax benefit of $774,000 for the three months ended March 31, 2020 as compared to income tax expense of $466,000 for the same period in 2019. The tax benefit for the quarter ended March 31, 2020 was primarily the result of a pretax operating loss for the quarter.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Results of Operations for the Six Months Ended March 31, 2020 and 2019

Overview. The Company reported net income of $2.8 million, or $1.18 per diluted share, for the six-month period ended March 31, 2020 compared to net income of $6.5 million, or $2.73 per diluted share, for the six-month period ended March 31, 2019.

Net Interest Income. Net interest income increased $2.4 million, or 12.2%, for the six-month period ended March 31, 2020 as compared to the same period in 2019. Average interest-earning assets increased $171.8 million and average interest-bearing liabilities increased $157.1 million when comparing the two periods. The tax-equivalent net interest margin was 3.78% for 2020 compared to 3.95% for 2019.

Total interest income increased $3.4 million, or 13.9%, when comparing the two periods due primarily to an increase in the average balance of interest-earning assets of $171.8 million, from $1.01 billion for 2019 to $1.18 billion for 2020, partially offset by a decrease in the average tax equivalent yield on interest-earning assets from 4.87% for 2019 to 4.74% for 2020. The majority of the increase in average interest-earning assets was attributable to loans. The average balance of loans increased $169.6 million, or 21.7%, compared to 2019.

Total interest expense increased $987,000, or 21.1%, due to an increase in the average balance of interest-bearing liabilities of $157.1 million, from $802.4 million for 2019 to $959.5 million for 2020, and an increase in the average cost of interest-bearing liabilities from 1.16% for 2019 to 1.18% for 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Average Balance Sheets. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs for the six-month periods ended March 31, 2020 and 2019. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances presented are daily averages. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans and investment securities have been adjusted to a tax equivalent basis using a federal marginal tax rate of 21%.

	Six Months Ended March 31,
	2020								2019
	Average Balance		Interest and Dividends			Yield/ Cost			Average Balance		Interest and Dividends			Yield/ Cost
Assets:	(Dollars in thousands)
Interest-bearing deposits with banks	$	47,295	$	358			1.51	%	$	33,261	$	374			2.25	%
Loans		952,552		23,705			4.98			782,930		20,055			5.12
Investment securities		157,603		3,508			4.45			158,845		3,602			4.54
Agency mortgage-backed securities		11,969		159			2.66			26,932		372			2.76
FRB and FHLB stock		14,511		305			4.20			10,183		263			5.17
Total interest-earning assets		1,183,930		28,035			4.74			1,012,151		24,666			4.87

Noninterest-earning assets		103,103								68,878
Total assets	$	1,287,033							$	1,081,029

Liabilities and equity:
NOW accounts	$	185,550	$	277			0.30	%	$	177,734	$	238			0.27	%
Money market deposit accounts		113,479		549			0.97			111,793		676			1.21
Savings accounts		121,167		48			0.08			119,298		46			0.08
Time deposits		291,565		2,500			1.71			263,038		2,071			1.57
Total interest-bearing deposits		711,761		3,374			0.95			671,863		3,031			0.90

Repurchase agreements		-		-			0.00			1,352		2			0.30
Fed funds purchased		71		1			2.82			-		-			0.00
FHLB borrowings		227,918		1,646			1.44			109,472		998			1.82
Other borrowings (1)		19,743		637			6.45			19,675		640			6.51
Total interest-bearing liabilities		959,493		5,658			1.18			802,362		4,671			1.16

Noninterest-bearing deposits		177,969								164,818
Other noninterest-bearing liabilities		25,592								10,710
Total liabilities		1,163,054								977,890

Total stockholders’ equity		123,919								101,706
Noncontrolling interest in subsidiary		60								1,433
Total equity		123,979							$	103,139

Total liabilities and equity	$	1,287,033							$	1,081,029
Net interest income (taxable equivalent basis)				22,377								19,995
Less: taxable equivalent adjustment				(575	)							(558	)
Net interest income			$	21,802							$	19,437
Interest rate spread							3.56	%							3.71	%
Net interest margin							3.78	%							3.95	%
Average interest-earning assets to average interest-bearing liabilities							123.39	%							126.15	%

(1) Includes subordinated debt.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income on a tax equivalent basis for the six-month periods ended March 31, 2020 and 2019. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.

	Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
		Increase (Decrease) Due to
		Rate			Volume			Net
		(In thousands)
Interest income:
Interest-bearing deposits with banks	$	(148	)	$	132		$	(16	)
Loans		(633	)		4,282			3,650
Investment securities		(66	)		(28	)		(94	)
Agency mortgage-backed securities		(10	)		(203	)		(213	)
FRB and FHLB stock		(58	)		100			42
Total interest-earning assets		(915	)		4,284			3,369

Interest expense:
Deposits		158			185			343
Repurchase agreements		-			(2	)		(2	)
Fed funds purchased		-			1			1
Borrowings from FHLB		(317	)		965			648
Subordinated debt		(5	)		2			(3	)
Total interest-bearing liabilities		(164	)		1,151			987

Net increase (decrease) in net interest income (tax equivalent basis)	$	(751	)	$	3,133		$	2,382

Provision for Loan Losses. The provision for loan losses was $2.2 million for the six-month period ended March 31, 2020 compared to $655,000, for the same period in 2019. Gross loans increased approximately $68.2 million for the six-month period ended March 31, 2020 compared to an increase of approximately $59.0 million for the six-month period ended March 31, 2019.

The Company recognized net charge-offs of $559,000 for the six-month period ended March 31, 2020, of which $364,000 was related to unguaranteed portions of SBA loans. The Company recognized net charge-offs of $44,000 for the same period in 2019. The increase in the provision for loan losses for 2020 was primarily due to increased nonperforming assets and net charge-offs for the period, as well as changes to qualitative factors within the allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.

-65-

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Noninterest Income. Noninterest income increased $16.3 million for the six months ended March 31, 2020 as compared to the same period in 2019. The increase was due primarily to increases in mortgage banking income and net gain on sales of SBA loans of $15.7 million and $505,000, respectively. The increase in mortgage banking income is due to production from the secondary-market residential mortgage lending segment that commenced operations in April 2018. Additional details regarding the financial performance of the mortgage banking and SBA lending segments are included in Note 13 to the consolidated financial statements.

Noninterest Expense. Noninterest expense increased $22.1 million for the six months ended March 31, 2020 as compared to the same period in 2019. The increase was due primarily to increases in compensation and benefits, advertising, occupancy and equipment, and other operating expenses of $17.2 million, $2.3 million, $1.2 million and $1.1 million, respectively. The increase in compensation and benefits expense is attributable to the addition of new employees to support the growth of the Company, including its mortgage banking and SBA lending activities, and routine salary and benefits adjustments. The increase in advertising is primarily due to the mortgage banking segment. The increase in occupancy and equipment expense is primarily attributable to increases in lease and rental, depreciation and equipment, and software licensing expenses that are primarily related to the mortgage banking segment. The increase in other operating expenses is primarily due to increases in loan expense related to the mortgage banking activities and charitable contributions.

Income Tax Expense. The Company recognized an income tax benefit of $136,000 for the six months ended March 31, 2020, compared to income tax expense of $988,000 for the same period in 2019. The income tax benefit for 2020 is a result of the Company’s tax-exempt income and investments in tax credit bonds.

-66-

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Liquidity and Capital Resources

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB borrowings. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At March 31, 2020, the Bank had cash and cash equivalents of $22.4 million and securities available-for-sale with a fair value of $184.7 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, borrowing capacity on a federal funds purchased line of credit facility with another financial institution and additional collateral eligible for repurchase agreements.

The Bank’s primary investing activity is the origination of commercial real estate and one-to-four family mortgage loans and, to a lesser extent, consumer, multi-family, commercial business and residential and commercial real estate construction loans. The Bank also invests in U.S. government agency and sponsored enterprises securities, mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies and sponsored enterprises, and municipal bonds.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. If these maturing deposits do not remain with the Bank, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.

The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay its operating expenses and other financial obligations, to pay any dividends and to repurchase any of its outstanding common stock. The Company’s primary source of income is dividends received from the Bank and the Captive. The amount of dividends that the Bank may declare and pay to the Company in any calendar year cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At March 31, 2020, the Company (unconsolidated basis) had liquid assets of $5.8 million.

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of March 31, 2020, the Bank was in compliance with all regulatory capital requirements that were effective as of such date, with Tier 1 capital (to average total assets), common equity Tier 1 capital (to risk-weighted assets), Tier 1 capital (to risk-weighted assets) and total capital (to risk-weighted assets) ratios of 8.91%, 10.59%, 10.59% and 11.67%, respectively. The regulatory requirements at that date were 5.0%, 6.5%, 8.0% and 10.0%, respectively, in order to be categorized as “well capitalized” under applicable regulatory guidelines. At March 31, 2020, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company's financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019.

For the six-month period ended March 31, 2020, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Qualitative Aspects of Market Risk. Market risk is the risk that the estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates by operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term residential mortgage, commercial mortgage and commercial business loans, all of which are retained by the Company for its portfolio. The Company relies on retail deposits as its primary source of funds. Management believes the primary use of retail deposits, complimented with a modest allocation of brokered certificates of deposit and FHLB borrowings, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.

Quantitative Aspects of Market Risk. Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Our earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve Board. Furthermore, the Company does not engage in hedging activities or purchase high-risk derivative instruments and also is not subject to foreign currency exchange rate risk or commodity price risk.

An element in our ongoing process is to measure and monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity of the balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the effects of various possible interest rate scenarios on projected net interest income over a one-year horizon. The model assumes a semi-static balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest rates over twelve months and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.

-69-

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Results of our simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s net interest income could change as follows over a one-year horizon, relative to our base case scenario.

	At March 31, 2020						At September 30, 2019
Immediate Change	One Year Horizon						One Year Horizon
in the Level	Dollar			Percent			Dollar			Percent
of Interest Rates		Change			Change			Change		Change
		(Dollars in thousands)
300bp	$	(1,896	)		(4.40	)%	$	(4,945	)	(12.43	)%
200bp		(477	)		(1.11	)		(2,197	)	(5.52	)
100bp		714			1.66			(993	)	(2.50	)
(100)bp		(1,830	)		(4.25	)		750		1.89
(200)bp		(2,900	)		(6.74	)		(616	)	(1.55	)

At March 31, 2020, our simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00% will increase our net interest income by $714,000, or 1.66%, over a one year horizon compared to a flat interest rate scenario. Furthermore, rate increases of 2.00% and 3.00% would cause net interest income to decrease by 1.11% and 4.40%, respectively. An immediate and sustained decrease in rates of 1.00% will decrease our net interest income by $1.8 million, or 4.25%, over a one year horizon compared to a flat interest rate scenario while a rate decrease of 2.00% would cause our net interest income to decrease by 6.74%. All estimated changes presented in the above table are within the policy guidelines approved by the Company’s Board of Directors.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 4

CONTROLS AND PROCEDURES

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of March 31, 2020, (the “Evaluation Date”), the Company performed an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective due to the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019 filed with the SEC on December 16, 2019 (the “2019 Form 10-K”).

Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As disclosed in our 2019 Form 10-K, management implemented additional controls and procedures described therein starting in the fourth quarter of 2019 in order to remediate the material weaknesses identified, and will continue to take steps as necessary that management and the Audit Committee believe will remediate the control deficiencies. Specifically, since the material weaknesses were identified management has updated its procedures to periodically test the estimate of direct loan origination costs and other assumptions used to calculate the fair value of interest rate lock commitments and loans held for sale, changed its methods of accruing and paying incentive compensation for the mortgage banking segment, and undertaken a process to review and update the compensation agreements for employees within the mortgage banking segment. In addition, management has engaged a consulting firm to independently review the assumptions used to value interest rate lock commitments and loans held for sale, as well as review the accounting and monthly closing processes for the mortgage banking segment to identify areas where efficiency can be improved. However, the identified control deficiencies that led to the material weaknesses in internal control over financial reporting will not be considered fully addressed until the new and additional controls, processes and procedures have been in operation for a sufficient period of time to allow the Company’s management to conclude, through testing, that the controls are operating effectively and the material weaknesses have been fully remediated. Management expects the remediation of the material weaknesses will be completed by September 30, 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is not a party to any legal proceedings. Periodically, there have been various claims and lawsuits involving the Bank, mainly as a plaintiff, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition or results of operations.

Item 1A.

Risk Factors

In addition to the risk factor disclosed below and other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2019 which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in our Annual Report on Form 10-K, except as described below. However, these are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has created extensive disruptions to the global and U.S. economies and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and the effects of COVID-19 could have a material adverse impact on us in a number of ways as described in more detail below.

Credit Risk – Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. Hotel and restaurant operators and others in the leisure, hospitality and travel industries, among other industries, have been particularly harmed by COVID-19. See “Part I – Item 2 – Management’s Discussion and Analysis for Financial Condition and Results of Operations – Covid-19 Pandemic” for information about the Company’s outstanding loans to borrowers in the hotel and restaurant industries. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our credit exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment, our customers depend more on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

OTHER INFORMATION

Strategic Risk – Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating loans.

Operational Risk – Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.

Moreover, we rely on many third parties in our business operations, including the appraiser of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Interest Rate Risk/Market Value Risk – Our net interest income, lending and investment activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on financial markets and market stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions could increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in prevailing fair market values of our investment securities and other assets, including mortgage servicing rights and SBA loan servicing rights. Fluctuations in interest rates will impact both the level of income and expense recorded on many of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information regarding the Company’s stock repurchase activity during the quarter ended March 31, 2020:

Period	(a) Total number of shares (or units) purchased		(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs (1)		(d) Maximum number (or appropriate dollar value) of shares (or units) that may yet be purchased under the plans or programs
Jan 1, 2020 through Jan 31, 2020		-	$	-		-		48,708
Feb 1, 2020 through Feb 29, 2020		3,906	$	63.68		3,906		44,802
Mar 1, 2020 through Mar 31, 2020		-	$	-		-		44,802
Total		3,906	$	63.68		3,906		44,802

(1) On November 16, 2012, the Company announced that its Board of Directors authorized a stock repurchase program to acquire up to 230,217 shares, or 10.0% of the Company’s outstanding common stock. Under the program, repurchases are to be conducted through open market purchases or privately negotiated transactions, and are to be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company. Repurchased shares are held in treasury.

Item 3.

Defaults upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

OTHER INFORMATION

Item 5.

Other Information

None.

Item 6.

Exhibits

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

	31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

	32.1	Section 1350 Certification of Chief Executive Officer

	32.2	Section 1350 Certification of Chief Financial Officer

	101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST SAVINGS FINANCIAL GROUP, INC.
	(Registrant)

Dated May 18, 2020	BY:	/s/ Larry W. Myers
		Larry W. Myers
		President and Chief Executive Officer

Dated May 18, 2020	BY:	/s/ Anthony A. Schoen
		Anthony A. Schoen
		Chief Financial Officer

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